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Material accounting policies (Policies)
 12 Months Ended
Dec. 31, 2022
Entity [Table]  
Basis of accounting
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
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 19);
–
 
fair value measurement (
 
refer to item 2f in this Note and
 
to Note 20);
–
 
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
 
17);
–
 
post-employment benefit plans
 
(refer to item 5 in this Note and to Note 2
 
6);
–
 
goodwill (refer
 
to item 8 in this Note and to Note 12); and
–
 
consolidation of structured
 
entities (refer to item 1 in this
 
Note and to Note 28).
Consolidation
1) Consolidation
The Financial
 
Statements include
 
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 req
 
uired 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.
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.
Financial instruments
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
 
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 fair value
through other
 
comprehensive income
 
(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 fair
 
value
 
through
 
profit or
 
loss (
 
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. This assessment includes
 
contractual cash flows that
 
may vary due to environmental,
 
social and governance
(ESG) triggers.
Financial liabilities
 
Financial liabilities measured at amortized
 
cost
 
Debt issued measured at amortized cost includes
 
contingent capital instruments contain
 
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 designates certain issued debt instruments as financial liabilities at fair
 
value through profit or
 
loss, on the basis that
such financial
 
instruments include
 
non-closely-related
 
embedded derivatives
 
that significantly
 
impact the
 
cash flows
 
of
the
 
instrument
 
and
 
/
 
or
 
are
 
managed
 
on
 
a
 
fair value
 
basis
 
(refer
 
to
 
the
 
table
 
below
 
for
 
more
 
information).
 
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 below.
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,
see below in this table.
 
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 derivatives (ETD)
 
and over-the-counter
(OTC)-cleared derivatives that are
 
legally settled on a daily
basis or economically 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 asset
 
s
 
mandatorily
measured at FVTPL that are
 
not held for trading, as
follows:
 
–
 
certain structured loans, certain
 
commercial loans, and
receivables from
 
securities financing transactions that
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;
–
 
sweep deposits;
–
 
payables
 
from securities financing transactions
 
;
 
–
 
non-structured debt
 
issued;
 
–
 
subordinated debt;
 
–
 
commercial paper and
 
certificates of deposit; 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.
 
Interest Income generated
 
from client deposits
derecognized pursuant
 
to certain deposit sweep programs
is presented within
Net interest income from financial
instruments measured at fair value
 
through profit or loss
and other
.
Measured at
FVTPL
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 o
 
f
 
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
economically 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.
Loan commitments
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
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.
Interest income and expense
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.
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.
Derecognition
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.
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
 
recorded
 
in
 
the
income statement.
 
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.
Fair value of financial instruments
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.
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 2
 
0d.
 
UBS‘s
 
governance framework over fair value measurement is described in Note 20b,
 
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 20f.
Allowances and provisions for expected credit losses
g.
 
Allowances and provisions for expected credit losses
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.
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
 
Basel III advanced
 
internal ratings-based
(A-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
 
judgment-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, which
 
is 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
 
(the
 
GMGC),
 
as
 
the
 
highest
 
authority
 
under
 
UBS’s
 
model
 
governance
framework, ratifies the decisions
 
taken by the ECL Management Forum.
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 cancel
 
lation
 
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 quantit
 
ative 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.
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 character
 
istics 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.
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 GMGC. The post-model adjustm
 
ents 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 19f.
Restructured and modified financial assets
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.
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.
Offsetting
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.
Hedge accounting
. Hedge accounting
The
 
Group
 
applies
 
hedge
 
accounting
 
requirements
 
of
 
IFRS 9
 
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 not permitted 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 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
Interest income
from financial
 
instruments measured
 
at amortized
 
cost and
 
fair value
 
through other
 
comprehensive income
 
or
Interest
expense
 
from financial
 
instruments
 
measured
 
at
 
amortized
 
cost
 
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 continues
 
hedge accounting during
 
the period of uncertainty before existing
 
interest rate benchmarks
 
are replaced
with alternative risk-free
 
interest rates.
 
During this
 
period, UBS
 
assumes 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 benchmark
 
s
 
by alternative
risk-free interest rates, UBS
 
applies the requirements
 
of
Amendments to IFRS 9,
 
IAS 39, IFRS 7, IFRS 4
 
and IFRS 16 (Interest
Rate Benchmark Reform – Phase 2),
where applicable
.
Fee and commission income and expenses
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
 
derivatives
execution and clearing). UBS recognizes
 
fees earned from PIT services when it has fully provided the
 
service to the client.
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.
PIT 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
 
revenues
 
as
Fee
 
and
 
commission
 
expense
,
 
and
 
those
 
that
 
are
 
related
 
to
personnel, general and administrative
 
expenses, which are
 
presented within
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.
Share-based and other deferred compensation plans
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.
Post-employment benefit plans
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 o
 
f
 
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‘s post-employment obligations is
 
provided in Note 26.
Defined contribution plans
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.
Income taxes
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 tax
 
assets (DTAs) and
 
deferred tax liabilities
 
(DTLs) are recognized for
 
temporary differences between
 
the carrying
amounts
 
and
 
tax bases
 
of
 
assets
 
and
 
liabilities
 
that will
 
result
 
in deductible
 
or
 
taxable amounts
 
,
 
respectively
 
in
 
future
periods.
 
DTAs may also arise from
 
other sources, including
 
unused tax losses and
 
unused tax credits. DTAs and
 
DTLs 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.
DTAs 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,
 
DTAs
 
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 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) with
 
respect to
 
current taxes
 
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
 
DTAs,
 
including
 
the
remaining tax
 
loss carry-forward
 
period, and its assessment
 
of expected
 
future taxable profits
 
in the forecast
 
period used
 
for recognizing
 
DTAs. 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
 
that the
 
value of
 
UBS’s DTAs
 
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.
Property, equipment and software
7)
 
Property, equipment and software
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.
Goodwill
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
 
of a
cash-generating
 
unit.
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 BoD. 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.
Provisions and contingent liabilities
9)
 
Provisions and contingent liabilities
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.
Foreign currency translation
10)
 
Foreign currency translation
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 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
.
Equity, treasury shares and contracts on UBS Group AG shares
11)
 
Equity, treasury shares and contracts on UBS
 
Group AG shares
Proceeds from
 
the issuance
 
of shares
 
are recognized
 
in
Share capital
 
for the nominal
 
value, with the
 
balance presented
in
Share premium
.
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
.
Contracts on UBS Group AG
 
shares
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]  
Basis of accounting
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
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 19);
–
 
fair value measurement (refer
 
to item 2f in this Note and to
 
Note 20);
–
 
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
 
17);
–
 
post-employment benefit plans
 
(refer to item 5 in this Note and to Note 2
 
6);
–
 
goodwill (refer
 
to item 8 in this Note and to Note 12); and
–
 
consolidation of structured
 
entities (refer to item 1 in this
 
Note and to Note 28).
Consolidation
1) Consolidation
The
 
Financial
 
Statements
 
include
 
the
 
financial
 
statements
 
of
 
the
 
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 g
 
ained
 
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.
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.
Financial instruments
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
 
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 fair value
through other
 
comprehensive income
 
(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 fair
 
value
 
through
 
profit or
 
loss (
 
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, the
 
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. This assessment includes
 
contractual cash flows that
 
may vary due to environmental,
 
social and governance
(ESG) triggers.
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
 
measured
 
at
 
amortized
 
cost
.
 
The
 
latter
 
includes
 
contingent
 
capital
 
instruments
 
issued
 
to
 
UBS
 
Group
 
AG
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 AG designates certain
 
issued debt instruments as financial
 
liabilities at fair value through
 
profit or loss, on the
 
basis
that such financial instruments include non
 
-closely-related embedded derivatives that
 
significantly impact the cash flows
of the instrument
 
and /
 
or are
 
managed on
 
a fair value
 
basis (refer
 
to the table
 
below for
 
more information).
 
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
 
below.
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,
see below in this table.
 
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 derivatives (ETD)
 
and over-the-counter
(OTC)-cleared derivatives that are
 
legally settled on a daily
basis or economically 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 asset
 
s
 
mandatorily
measured at FVTPL that are
 
not held for trading, as
follows:
 
–
 
certain structured loans, certain
 
commercial loans, and
receivables from
 
securities financing transactions that
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;
–
 
sweep deposits;
–
 
payables
 
from securities financing transactions
 
;
 
–
 
non-structured debt
 
issued;
 
–
 
subordinated debt;
 
–
 
commercial paper and
 
certificates of deposit;
 
–
 
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.
 
Interest Income generated
 
from client deposits
derecognized pursuant
 
to certain deposit sweep programs
is presented within
Net interest income from financial
instruments measured at fair value
 
through profit or loss
and other
.
Measured at
FVTPL
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 presentati
 
on 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
economically 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;
–
 
obligations against funding
 
from UBS Group AG
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.
Loan commitments
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
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.
Interest income and expense
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.
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.
Derecognition
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.
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
 
recorded
 
in
 
the
income statement.
 
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.
Fair value of financial instruments
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.
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 2
 
0d.
 
UBS AG’s governance framework over fair value measurement is
 
described in Note 20b,
 
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 20f.
Allowances and provisions for expected credit losses
g.
 
Allowances and provisions for expected credit losses
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.
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
 
Basel III advanced
 
internal
 
ratings-
based
 
(A-IRB)
 
models that
 
are also
 
used
 
in determi
 
ning
 
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
 
judgment-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 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, which
 
is 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
 
(the
 
GMGC),
 
as
 
the
 
highest
 
authority
 
under
 
UBS
 
AG’s
 
model
 
governance
framework, ratifies the decisions
 
taken by the ECL Management Forum.
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 ability
 
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 o
 
f
 
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.
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 situa
 
tions 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.
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 weight
 
s
 
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 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 19f
Restructured and modified financial assets
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.
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.
Offsetting
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. 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.
Hedge accounting
j. Hedge accounting
UBS AG applies hedge accounting
 
requirements of IFRS 9 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 not permitted 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 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
Interest income
from financial
 
instruments measured
 
at amortized
 
cost and
 
fair value
 
through other
 
comprehensive income
 
or
Interest
expense
 
from financial
 
instruments
 
measured
 
at
 
amortized
 
cost
 
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
 
continues
 
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
 
assumes
 
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,
 
UBS AG
 
applies the requirements
 
of
Amendments to IFRS 9
 
,
 
IAS 39, IFRS 7, IFRS 4
and IFRS 16 (Interest Rate Benchmark
 
Reform – Phase 2),
where applicable
.
Fee and commission income and expenses
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 PIT
 
services
 
when it
 
has fully
 
provided the
 
service
 
to the
client.
 
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.
PIT 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 revenues
 
as
Fee and commission expense
, and those that are
 
related
to
 
personnel,
 
general
 
and
 
administrative
 
expenses,
 
which
 
are
 
presented
 
within
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.
Share-based and other deferred compensation plans
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.
Post-employment benefit plans
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 o
 
f
 
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 26.
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.
Income taxes
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 tax
 
assets (DTAs) and
 
deferred tax liabilities
 
(DTLs) are recognized
 
for temporary differences
 
between the carrying
amounts
 
and
 
tax bases
 
of
 
assets
 
and
 
liabilities
 
that will
 
result
 
in deductible
 
or
 
taxable amounts
 
,
 
respectively
 
in
 
future
periods.
 
DTAs may also arise from
 
other sources, including
 
unused tax losses and
 
unused tax credits. DTAs and
 
DTLs 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.
DTAs 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,
 
DTAs
 
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 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) with
 
respect to
 
current taxes
 
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 factor
 
s
 
when evaluating
 
the recoverability
 
of its
 
DTAs,
 
including
 
the
remaining tax
 
loss carry-forward
 
period, and its assessment
 
of expected
 
future taxable profits
 
in the forecast
 
period used
 
for recognizing
 
DTAs. 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 that the value of UBS AG’s DTAs
 
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.
Property, equipment and software
7)
 
Property, equipment and software
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.
Goodwill
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
 
of a
cash-generating
 
unit.
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 BoD. 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.
Provisions and contingent liabilities
9)
 
Provisions and contingent liabilities
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
 
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 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.
Foreign currency translation
10)
 
Foreign currency translation
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
.
Equity, treasury shares and contracts on UBS Group AG shares
11)
 
Contracts on UBS Group AG shares
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.