Summary of material accounting policies - Material accounting policies

12 Months Ended

Dec. 31, 2023

Disclosure Of Material Accounting Policy Information [Line Items]

Material accounting policies

Note 1 Summary of material accounting policies (continued)

a) Material accounting policies

This Note describes the material accounting policies applied in the preparation of the consolidated financial statements

(the Financial Statements) of UBS Group AG and its subsidiaries (UBS or the Group). On 21 March 2024, the Financial

Statements were authorized for issue by the UBS Group AG Board of Directors (the BoD). 

Basis of accounting

The Financial Statements have been prepared in accordance with IFRS Accounting Standards, as issued by the

International Accounting Standards Board (the IASB), and are presented in US dollars.

Disclosures marked as audited in the “Risk, capital, liquidity and funding, and balance sheet” section of this report form

an integral part of the Financial Statements. These disclosures relate to requirements under IFRS 7,

Financial Instruments:

Disclosures

, and IAS 1,

Presentation of Financial Statements

, and are not repeated in this section. 

The accounting policies described in this Note have been applied consistently in all years presented unless otherwise

stated in Note 1b.

Critical accounting estimates and judgments

Preparation of these Financial Statements under IFRS Accounting Standards 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:

–

provisional amounts of identifiable assets acquired and liabilities assumed for the acquisition of the Credit Suisse Group (refer to item 1 in this Note and

to Note 2);

–

expected credit loss measurement (refer to item 2g in this Note and to Note 20);

–

fair value measurement (refer to item 2f in this Note and to Note 21);

–

income taxes (refer to item 6 in this Note and to Note 9);

–

provisions and contingent liabilities (refer to item 10 in this Note and to Note 18);

–

post-employment benefit plans (refer to item 5 in this Note and to Note 27);

–

goodwill (refer to item 9 in this Note and to Note 13); and

–

consolidation of structured entities (refer to item 1 in this Note and to Note 29).

1) Consolidation and business combinations

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 the entity‘s variable returns; and (iii) the ability to use its power to affect its own

returns.

Consideration is given to all facts and circumstances to determine whether the Group has power over another entity, i.e.,

the current ability to direct the relevant activities of an entity when decisions about those activities need to be made. 

Subsidiaries, including SEs, are consolidated from the date when control is gained and deconsolidated from the date

when control ceases. Control, or the lack thereof, is reassessed if facts and circumstances indicate that there is a change

to one or more elements required to establish that control is present.

›

Refer to Note 29 for more information

Critical accounting estimates and judgments

Each individual entity is assessed for consolidation in line with the aforementioned consolidation principles. The assessment of control can be complex and

requires the use of significant judgment, in particular in determining whether UBS has power over the entity. As the nature and extent of UBS’s involvement

is unique for each entity, there is no uniform consolidation outcome by entity. Certain entities within a class may be consolidated while others may not.

When carrying out the consolidation assessment, judgment is exercised considering all the relevant facts and circumstances, including the nature and activities

of the investee, as well as the substance of voting and similar rights.

›

Refer to Note 29 for more information

Business combinations

Business combinations are accounted for using the acquisition method, as prescribed by IFRS 3,

Business Combinations

.

Under this method, any excess of the acquisition-date amounts of the identifiable net assets acquired over the fair value

of the consideration transferred results in negative goodwill that is recognized in the income statement on the date of

the acquisition, with transaction costs expensed as incurred. Provisional amounts of identifiable assets acquired, liabilities

assumed and purchase consideration determined as of the acquisition date may be subject to adjustments within a

maximum of one year from the acquisition date (referred to in this report as measurement period adjustments).

The amount of non-controlling interests, if any, is measured at the non-controlling interest’s proportionate share of the

acquiree’s identifiable net assets.

Critical accounting estimates and judgments

When complete information about all relevant facts and circumstances of the acquisition date is not practically available to UBS at the time when the initial

acquisition accounting was applied in the period of acquisition, the amounts that form part of the business combination accounting are considered provisional

and subject to further measurement period adjustments if new information about facts and circumstances existing on the date of the acquisition is obtained

within one year from the acquisition date. In addition, the use of valuation techniques, modeling assumptions and estimates of unobservable market inputs

in determining fair values require significant judgment and could affect the provisional amounts of identifiable assets acquired, liabilities assumed and

purchase consideration, thereby affecting the resulting goodwill / negative goodwill arising from the business combination.

›

Refer to Note 2 for more information relating to the acquisition of the Credit Suisse Group

2) Financial instruments

a. Recognition

UBS generally recognizes financial instruments when it becomes a party to contractual provisions of an instrument.

However, UBS does not recognize assets received in transfers that do not qualify for derecognition by the transferor

(applying derecognition principles under IFRS Accounting Standards as described in item 2e below). UBS applies

settlement date accounting to all standard purchases and sales of non-derivative financial instruments. 

UBS may act 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 of 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 certain hedge accounting relationships (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 at the time an asset is recognized. 

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 issued prior to November 2023 that

contain contractual provisions under which the principal amounts would be written down 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. Issuances after November 2023 include a contractual equity

conversion feature with the same triggers, i.e., a CET1 ratio breach or FINMA viability event. When the debt is issued in

US dollars, these conversion features are classified as equity and are accounted for in

Share premium

 separately from the

amortized cost debt host.

When the legal bail-in mechanism for write-down or conversion into equity does not form part of the contractual terms

of issued debt instruments, it does not affect the accounting classification of these instruments as debt or equity.

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. 

Financial liabilities measured at fair value through profit or loss 

UBS designates certain issued debt instruments as financial liabilities at fair value through profit or loss, on the basis that

such financial instruments include embedded derivatives that are not closely related and which 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;

–

amounts due from 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

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

Financial assets mandatorily measured at FVTPL that are

not held for trading include: 

–

certain structured instruments, 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 of a financial liability

designated at FVTPL that is attributable to changes in

UBS’s own credit risk is presented in

Other comprehensive

income

 directly within

Retained earnings

 and is never

reclassified to the income statement.

Derivative liabilities (including derivatives that are

designated and effective hedging instruments) are

generally presented as

Derivative financial instruments

,

except those exchange-traded and OTC-cleared

derivatives that are legally settled on a daily basis or

economically net settled on a daily basis, which are

presented within

Cash collateral payables on derivative

instruments.

Designated at

FVTPL

Financial liabilities designated at FVTPL include:

–

issued hybrid debt instruments, primarily equity-

linked, credit-linked and rates-linked bonds or notes;

–

issued debt instruments managed on a fair value

basis;

–

certain payables from securities financing

transactions;

–

amounts due under unit-linked investment contracts,

the cash flows of which are linked to financial assets

measured at FVTPL and eliminate an accounting

mismatch; and

–

brokerage payables, which arise in conjunction with

brokerage receivables and are measured at FVTPL to

achieve measurement consistency.

c. Loan commitments and financial guarantees

Loan commitments are arrangements to provide credit under defined terms and conditions. Irrevocable loan

commitments are classified as: (i) derivative loan commitments measured at fair value through profit or loss; (ii) loan

commitments designated at fair value through profit or loss; or (iii) loan commitments not measured at fair value.

Financial guarantee contracts are contracts that require UBS to make specified payments to reimburse the holder for an

incurred loss because a specified debtor fails to make payments when due in accordance with the terms of a specified

debt instrument.

d. Interest income and expense

Interest income and expense are recognized in the income statement based on the effective interest method. When

calculating the effective interest rate (the EIR) for financial instruments (other than credit-impaired financial instruments),

UBS estimates future cash flows considering all contractual terms of the instrument, but not expected credit losses, with

the EIR applied to the gross carrying amount of the financial asset or the amortized cost of a financial liability. However,

when a financial asset becomes credit impaired after initial recognition, interest income is determined by applying the

EIR to the amortized cost of the instrument, which represents the gross carrying amount adjusted for any credit loss

allowance. 

Upfront fees, including fees on loan commitments not measured at fair value where a loan is expected to be issued, and

direct costs are included within the initial measurement of a financial instrument measured at amortized cost or FVOCI

and recognized over the expected life of the instrument as part of its EIR.

Fees related to loan commitments where no loan is expected to be issued, as well as loan syndication fees where UBS

does not retain a portion of the syndicated loan or where UBS does retain a portion of the syndicated loan at the same

effective yield for comparable risk as other participants, are included in

Net fee and commission income

 and either

recognized over the life of the commitment or when syndication occurs.

›

Refer to item 3 in this Note for more information

Interest income on financial assets, excluding derivatives, is included in interest income when positive and in interest

expense when negative. Similarly, interest expense on financial liabilities, excluding derivatives, is included in interest

expense, except when interest rates are negative, in which case it is included in interest income.

›

Refer to item 2b in this Note and Note 4 for more information

e. Derecognition 

Financial assets

UBS derecognizes a transferred financial asset, or a portion of a financial asset, if the purchaser has obtained 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.

›

Refer to Note 23 for more information 

Financial liabilities

UBS derecognizes a financial liability when it is extinguished, i.e., when the obligation specified in the contract is

discharged, canceled or expires. When an existing financial liability is exchanged for a new one from the same lender on

substantially different terms, or the terms of an existing liability are substantially modified, the original liability is

derecognized and a new liability recognized with any difference in the respective carrying amounts 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 a variation margin

on a daily basis represents a legal or economic settlement, which results in derecognition of the associated derivatives.

›

Refer to Note 22 for more information 

f. Fair value of financial instruments

UBS accounts for a significant portion of its assets and liabilities at fair value. Fair value is the price on the measurement

date that would be received for the sale of an asset or paid to transfer a liability in an orderly transaction between market

participants in the principal market, or in the most advantageous market in the absence of a principal market.

›

Refer to Note 21 for more information

Critical accounting estimates and judgments

The use of valuation techniques, modeling assumptions and estimates of unobservable market inputs in the fair valuation of financial instruments requires

significant judgment and could affect the amount of gain or loss recorded for a particular position. Valuation techniques that rely more heavily on

unobservable inputs and sophisticated models inherently require a higher level of judgment and may require adjustment to reflect factors that market

participants would consider in estimating fair value, such as close-out costs, which are presented in Note 21d. 

UBS‘s governance framework over fair value measurement is described in Note 21b, and UBS provides a sensitivity analysis of the estimated effects arising

from changing significant unobservable inputs in Level 3 financial instruments to reasonably possible alternative assumptions in Note 21f.

›

Refer to Note 21 for more information

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 comm itted 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

ECL 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 credit impaired (PCI).

PCI 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. 

Consistent with the requirements of IFRS 3 and IFRS 9, immediately after the application of the acquisition method to

the business combination, acquired financial instruments carried at amortized cost or FVOCI that are not deemed credit

impaired are classified as stage 1 financial instruments and a maximum 12-month ECL is recognized, resulting in a carrying

amount of the respective financial instruments below their acquisition -date fair value. 

All or part of a financial asset is written off if it is deemed uncollectible or forgiven. Write-offs reduce the principal amount

of a claim and are charged against related allowances for credit losses. Recoveries, in part or in full, of amounts previously

written off are generally credited to

Credit loss expense / (release)

. 

ECL are recognized in the income statement in

Credit loss expense / (release)

. A corresponding ECL allowance is reported

as a decrease in the carrying amount of financial assets measured at amortized cost on the balance sheet. For financial

assets that are measured at FVOCI, the carrying amount is not reduced, but an accumulated amount is recognized in

Other comprehensive income

. For off-balance sheet financial instruments and other credit lines, provisions for ECL are

presented in

Provisions.

Default and credit impairment

UBS applies a single definition of default for credit risk management purposes, regulatory reporting and ECL, with a

counterparty classified as defaulted based on quantitative and qualitative criteria.

›

Refer to the “Risk management and control” section of this report for more information

Measurement of expected credit losses

IFRS 9 ECL reflect an unbiased, probability -weighted estimate based on loss expectations resulting from default events.

The method used to calculate ECL applies the following principal factors: probability of default (PD), loss given default

(LGD) and exposure at default (EAD). Parameters are generally determined on an individual financial asset level. Based

on the materiality of the portfolio, for credit card exposures and personal account overdrafts in Switzerland, a portfolio

approach is applied that derives an average PD and LGD for the entire portfolio. PDs and LGDs used in the ECL calculation

are point-in-time(PIT)-based for key portfolios and consider both current conditions and expected cyclical changes. For

material portfolios, PDs and LGDs are determined for different scenarios, whereas EAD projections are treated as scenario

independent.

For the purpose of determining the ECL-relevant parameters, UBS leverages its 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: 

–

gross domestic product (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 UBS’s corporate rating tools.

Scenario generation, review process and governance

A team of economists, which is part of Group Risk Control, develops the forward -looking macroeconomic assumptions

with involvement from a broad range of experts.

The scenarios, their weights 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.

›

Refer to Note 20 for more information

ECL measurement period 

The period for which lifetime ECL are determined is based on the maximum contractual period that UBS is exposed to

credit risk, taking into account contractual extension, termination and prepayment options. For irrevocable loan

commitments and financial guarantee contracts, the measurement period represents the maximum contractual period

for which UBS has an obligation to extend credit.

Additionally, some financial instruments include both an on-demand loan and a revocable undrawn commitment, where

the contractual cancellation right does not limit UBS’s exposure to credit risk to the contractual notice period, as the

client has the ability to draw down funds before UBS can take risk-mitigating actions. In such cases UBS is required to

estimate the period over which it is exposed to credit risk. This applies to UBS’s credit card limits, which do not have a

defined contractual maturity date, are callable on demand and where the drawn and undrawn components are managed

as one exposure. The exposure arising from UBS’s credit card limits is not significant and is managed at a portfolio level,

with credit actions triggered when balances are past due. An ECL measurement period of seven years is applied for credit

card limits, capped at 12 months for stage 1 balances, as a proxy for the period that UBS is exposed to credit risk.

Customary master credit agreements in the Swiss corporate market also include on-demand loans and revocable undrawn

commitments. For smaller commercial facilities, a risk-based monitoring (RbM) approach is in place that highlights

negative trends as risk events, at an individual facility level, based on a combination of continuously updated risk

indicators. The risk events trigger additional credit reviews by a risk officer, enabling informed credit decisions to be taken.

Larger corporate facilities are not subject to RbM, but are reviewed at least annually through a formal credit review. UBS

has assessed these credit risk management practices and considers both the RbM approach and formal credit reviews as

substantive credit reviews resulting in a re-origination of the given facility. Following this, a 12-month measurement

period from the reporting date is used for both types of facilities as an appropriate proxy of the period over which UBS

is exposed to credit risk, with 12 months also used as a look-back period for assessing an SICR, always from the respective

reporting date.

Significant increase in credit risk 

Financial instruments subject to ECL are monitored on an ongoing basis. To determine whether the recognition of a

maximum 12 -month ECL continues to be appropriate, an assessment is made as to whether an SICR has occurred

since initial recognition of the financial instrument, applying both quantitative and qualitative factors. 

Primarily, UBS assesses changes in an instrument’s risk of default on a quantitative basis by comparing the annualized

forward-looking and scenario-weighted lifetime PD of an instrument determined at two different dates: 

–

at the reporting date; and 

–

at inception of the instrument.

If, based on UBS’s quantitative modeling, an increase exceeds a set threshold, an SICR is deemed to have occurred and

the instrument is transferred to stage 2 with lifetime ECL recognized.

The threshold applied varies depending on the original credit quality of the borrower, with a higher SICR threshold set

for those instruments with a low PD at inception. The SICR assessment based on PD changes is made at an individual

financial asset level. A high-level overview of the SICR trigger, which is a multiple of the annualized remaining lifetime

PIT PD expressed in rating downgrades, is provided in the “SICR thresholds” table below. The actual SICR thresholds

applied are defined on a more granular level by interpolating between the values shown in the table.

SICR thresholds

Internal rating at origination 

of the instrument

Rating downgrades /

SICR trigger

0–3

3

4–8

2

9–13

1

›

Refer to the “Risk management and control” section of this report for more details about UBS’s internal rating system

Irrespective of the SICR assessment based on default probabilities, credit risk is generally deemed to have significantly

increased for an instrument if 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 trans ferred 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, where applicable. For instruments in Personal & Corporate Banking

and Global Wealth Management Region Switzerland that are between 90 and 180 days past due but have not been

reclassified to stage 3, a one-year period is applied before a transfer back to stage 1 can be triggered.

Additionally, based on individual counterparty-specific indicators, external market indicators of credit risk or general

economic conditions, counterparties may be moved to a watch list, which is used as a secondary qualitative indicator for

an SICR. Exception management is further applied, allowing for individual and collective adjustments on exposures

sharing the same credit risk characteristics to take account of specific situations that are not otherwise fully reflected.

In general, the overall SICR determination process does not apply to Lombard loans, securities financing transactions and

certain other asset-based lending transactions, because of the risk management practices adopted, including daily

monitoring processes with strict margining. If margin calls are not satisfied, a position is closed out and classified as a

stage 3 position. In exceptional cases, an individual adjustment and a transfer into stage 2 may be made to take account

of specific facts.

Credit risk officers are responsible for the identification of an SICR, which for accounting purposes is in some respects

different from internal credit risk management processes. This difference mainly arises because ECL accounting

requirements are instrument-specific, such that a borrower can have multiple exposures allocated to different stages, and

maturing loans in stage 2 will migrate to stage 1 upon renewal irrespective of the actual credit risk at that time. Under a

risk-based approach, a holistic counterparty credit assessment and the absolute level of risk at any given date will

determine what risk-mitigating actions may be warranted.

›

Refer to the “Risk management and control” section of this report for more information

Critical accounting estimates and judgments

The calculation of ECL requires management to apply significant judgment and make estimates and assumptions that can result in significant changes to the

timing and the 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 that may significantly

affect ECL. The models are governed by UBS’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 20f.

›

Refer to Note 20 for more information

h. Restructured and modified financial assets

When payment default is expected, or where default has already occurred, UBS may grant concessions to borrowers in

financial difficulties that it would not consider in the normal course of its business, such as preferential interest rates,

extension of maturity, modifying the schedule of repayments, debt / equity swap, subordination, etc.

›

Refer to the “Risk management and control” section of this report for more information

Modifications result in an alteration of future contractual cash flows and can occur within UBS’s normal risk tolerance or

as part of a credit restructuring where a counterparty is in financial difficulties. The restructuring or modification of a

financial asset could lead to a substantial change in the terms and conditions, resulting in the original financial asset

being derecognized and a new financial asset being recognized. Where the modification does not result in a

derecognition, any difference between the modified contractual cash flows discounted at the original EIR and the existing

gross carrying amount of the given financial asset is recognized in the income statement as a modification gain or loss.

i. Offsetting

UBS presents financial assets and liabilities on its balance sheet net if (i) it has a legally enforceable right to set off the

recognized amounts and (ii) it intends either to settle on a net basis or to realize the asset and settle the liability

simultaneously. Netted positions include, for example, certain derivatives and repurchase and reverse repurchase

transactions with various counterparties, exchanges and clearing houses.

In assessing whether UBS intends to either settle on a net basis, or to realize the asset and settle the liability

simultaneously, emphasis is placed on the effectiveness of operational settlement mechanics in eliminating substantially

all credit and liquidity exposure between the counterparties. This condition precludes offsetting on the balance sheet for

substantial amounts of UBS’s financial assets and liabilities, even though they may be subject to enforceable netting

arrangements. Repurchase arrangements and securities financing transactions are presented net only to the extent that

the settlement mechanism eliminates, or results in insignificant, credit and liquidity risk, and processes the receivables

and payables in a single settlement process or cycle.

›

Refer to Note 22

for more information 

j. 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 continued hedge accounting during the period of uncertainty before existing interest rate benchmarks were replaced

with alternative risk-free interest rates. During this period, UBS assumed that the current benchmark rates would continue

to exist, such that forecast transactions were 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 applied the requirements of

Amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and

IFRS 16 (Interest Rate Benchmark Reform – Phase 2)

,

where applicable

.

›

Refer to Note 26 for more information

3) Fee and commission income and expenses

UBS earns fee income from the diverse range of services it provides to its clients. Fee income can be divided into two

broad categories: fees earned from services that are provided over a certain period of time, such as management of

clients’ assets, custody services and certain advisory services; and fees earned from PIT 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, or depreciation and amortization, 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.

›

Refer to Note 5 for more information, including the disaggregation of revenues

4) Share-based and other deferred compensation plans

UBS recognizes expenses for deferred compensation awards over the period that the employee is required to provide

service to become entitled to the award. Where the service period is shortened, for example in the case of employees

affected by restructuring programs or mutually agreed termination provisions, recognition of such expense is accelerated

to the termination date. Where no future service is required, such as for employees who are eligible for retirement or

who have met certain age and length-of-service criteria, the services are presumed to have been received and

compensation expense is recognized over the performance year or, in the case of off-cycle awards, immediately on the

grant date.

Share-based compensation plans

Share-based compensation expense is measured by reference to the fair value of the equity instruments on the date of

grant, taking into account the terms and conditions inherent in the award, including, where relevant, dividend rights,

transfer restrictions in effect beyond the vesting date, market conditions, and non-vesting conditions. 

For equity-settled awards, fair value is not remeasured unless the terms of the award are modified such that there is an

incremental increase in value. Expenses are recognized, on a per-tranche basis, over the service period based on an

estimate of the number of instruments expected to vest and are adjusted to reflect the actual outcomes of service or

performance conditions.

For equity-settled awards, forfeiture events resulting from a breach of a non-vesting condition (i.e., one that does not

relate to a service or performance condition) do not result in any adjustment to the share-based compensation expense.

For cash-settled share-based awards, fair value is remeasured at each reporting date, so that the cumulative expense

recognized equals the cash distributed. 

Other deferred compensation plans

Compensation expense for other deferred compensation plans is recognized on a per-tranche or straight-line basis,

depending on the nature of the plan. The amount recognized is measured based on the present value of the amount

expected to be paid under the plan and is remeasured at each reporting date, so that the cumulative expense recognized

equals the cash or the fair value of respective financial instruments distributed.

›

Refer to Note 28 for more information

5) Post-employment benefit plans

Defined benefit plans

Defined benefit plans specify an amount of benefit that an employee will receive, which usually depends on one or more

factors, such as age, years of service and compensation. The defined benefit liability recognized in the balance sheet is

the present value of the defined benefit obligation, measured using the projected unit credit method, less the fair value

of the plan’s assets at the balance sheet date, with changes resulting from remeasurements recorded immediately in

Other comprehensive income

. If the fair value of the plan’s assets is higher than the present value of the defined benefit

obligation, the recognition of the resulting net asset is limited to the present value of economic benefits available in the

form of refunds from the plan or reductions in future contributions to the plan. Calculation of the net defined benefit

obligation or asset takes into account the specific features of each plan, including risk sharing between employee and

employer, and is calculated periodically by independent qualified actuaries.

Critical accounting estimates and 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 27.

›

Refer to Note 27

for more information

Defined contribution plans

A defined contribution plan pays fixed contributions into a separate entity from which post-employment and other

benefits are paid. UBS has no legal or constructive obligation to pay further amounts if the plan does not hold sufficient

assets to pay employees the benefits relating to employee service in the current and prior periods. Compensation expense

is recognized when the employees have rendered services in exchange for contributions. This is generally in the year of

contribution. Prepaid contributions are recognized as an asset to the extent that a cash refund or a reduction in future

payments is available.

6) Income taxes

UBS is subject to the income tax laws of Switzerland and those of the non-Swiss jurisdictions in which UBS has business

operations.

The Group’s provision for income taxes is composed of current and deferred taxes. Current income taxes represent taxes

to be paid or refunded for the current period or previous periods . 

Deferred 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 that 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.

›

Refer to Note 9 for more information 

7) Investments in associates

Interests in entities where UBS has significant influence over the financial and operating policies of these entities but does

not have control are classified as investments in associates and accounted for under the equity method of accounting.

Typically, UBS has significant influence when it holds, or has the ability to hold, between 20% and 50% of an entity’s

voting rights. Investments in associates are initially recognized at cost, and the carrying amount is increased or decreased

after the date of acquisition to recognize the Group’s share of the investee’s comprehensive income and any impairment

losses. The net investment in an associate is impaired if there is objective evidence of a loss event and the carrying amount

of the investment in the associate exceeds its recoverable amount.

›

Refer to Note 29 for more information

8) Property, equipment and software

Property, equipment and software

 is measured at cost less accumulated depreciation 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 9 in this Note. An impairment charge is recognized for such

assets if the recoverable amount is below its carrying amount. The recoverable amounts of such assets, other than

property that has a market price, are generally determined using a replacement cost approach that reflects the amount

that would be currently required by a market participant to replace the service capacity of the asset. If such assets are no

longer used, they are tested individually for impairment.

›

Refer to Note 12 for more information

9) Goodwill and other separately identifiable intangible assets

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.

Negative goodwill, generally determined based on the difference between the (provisional) fair values for the identifiable

assets acquired and liabilities assumed and consideration transferred, is recognized in the income statement on the

acquisition date.

Separately from goodwill, UBS recognizes identifiable intangible assets acquired in a business combination that were not

previously recognized in the financial statements of the acquiree. Amortization of these intangible assets is recognized

on a straight -line basis over their estimated useful life. These assets are tested for impairment at the appropriate cash-

generating-unit level.

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 (typically estimated on a discrete basis for years one to three but could extend up to five years, as permitted under IFRS Accounting

Standards, in order to reflect facts and circumstances specific to a cash-generating unit); (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.

›

Refer to Notes 3 and 13 for more information 

10) 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. Consistent

with this presentational approach, fair value of loans commitments and financial guarantees acquired through a business

combination is also presented in

Provisions

.

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.

Contingent liabilities, more specifically in relation to litigations, recognized in a business combination are initially

measured at fair value. Subsequently, they are measured at the higher of the initial fair value and the amount that would

be recognized in accordance with the requirements for provisions outlined above, until the contingency is resolved.

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, the timing and the 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 the amount of any potential outflows.

›

Refer to item 1 in this Note, Note 2 and Note 18 for more information

11) 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

.

›

Refer to Note 33 for more information

12) 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

.