Annual Report 2007 1 | Strategy, Performance and Responsibility 2 | Risk, Treasury and Capital Management 3 | Corporate Governance and Compensation Report 4 | Financial Statements Contents Introduction 1 Contacts 2 Accounting Standards and Policies 3 Financial Statements 9 UBS AG (Parent Bank) 121 Additional Disclosure Required under SEC Regulations 143 1 Introduction Introduction This year we have changed the structure of our annual re- Financial Statements 2007 port. Based on feedback from users, our annual report now This comprises the audited financial statements of UBS for consists of four themed reports. These combine audited and 2007, 2006 and 2005, prepared according to the Interna- non-audited information. tional Financial Reporting Standards (IFRS). It also includes Together, the four reports make up UBS’s full Annual Re- the audited financial statements of UBS AG (the parent port 2007 and replace the former Financial Report, the bank) for 2007 and 2006, prepared according to Swiss bank- Handbook and the Compensation Report. They comply with ing law. Additional disclosure required by Swiss and US regu- the US disclosure requirements for foreign private issuers as lations is included where appropriate. defined by Form 20-F of the Securities and Exchange Com- mission (SEC). In addition to the four reports, Review 2007 is distributed broadly to UBS shareholders and contains key information The four reports are: on our strategy and financials. This booklet summarizes the information in the four-part annual report. Strategy, Performance and Responsibility 2007 This provides a description of our firm, its strategy, organiza- If you only ordered specific reports in prior years, please note tional structure and financial performance for the last two that the former Compensation Report is now called Corpo- years. It also discusses our standards for corporate behavior rate Governance and Compensation Report 2007, and the and responsibility, outlines demographic trends in our work- former Annual Review is now called Review 2007. Our con- force and describes the way our people learn and are led. tact details are listed in the final pages of this report – please be in contact with us so that we can arrange delivery of the Risk, Treasury and Capital Management 2007 reports you require. In addition to outlining the principles by which we manage and control risk, this report provides an account of develop- This report contains information that is current as of the date ments in credit risk, market risk, operational risk and treasury of this report. We undertake no obligation to update this management during 2007. It also provides information on information or notify you if it should change or if new infor- UBS shares. mation should become available. Corporate Governance and Compensation Report 2007 Our aim is to provide publications that are useful and infor- Comprehensive information on our governance arrangements mative. In order to ensure that UBS remains among the lead- is included in this report, which also explains how we manage ing providers of corporate disclosure, we would like to hear our relationships with regulators and shareholders. Compen- your opinions on how we can improve the content and pre- sation of senior management and the Board of Directors sentation of our products (see contact details on the final (executive and non-executive members) is discussed here. pages of this report). UBS 2 Accounting Standards and Policies Accounting Standards and Policies Accounting Principles Accounting Principles UBS Financial Statements have been prepared in accor- revenues to business units on a reasonable basis. Inter- dance with International Financial Reporting Standards business unit charges are predominantly reported in the line (IFRS). Until 2006, UBS also reconciled its Financial State- “Services (to) / from other business units” for both Business ments to US Generally Accepted Accounting Principles (US units concerned. Transactions between Business units are GAAP). It will now no longer do so after the SEC released a conducted at internally agreed transfer prices or at arm’s final rule on 21 December 2007 under which financial length. Corporate Center expenses are allocated to the statements from foreign private issuers in the US will be ac- operating Business units to the extent appropriate. cepted without reconciliation to GAAP if they are prepared Net interest income is allocated to the Business units in accordance with IFRS as issued by the International based on their balance sheet positions. Assets and liabilities Accounting Standards Board. As a US listed company, we of the financial businesses are funded through and invested had provided in the Annual Financial Statements until and with the central treasury departments, with the net margin including 31 December 2006 a description of the signifi- reflected in the results of each Business unit. To complete the cant differences which would have arisen if our accounts allocation, the financial businesses are credited with interest had been presented under US GAAP, a detailed reconcilia- income on their regulatory capital requirements adding tion of equity and net profit attributable to UBS share- goodwill and excess intangible assets (see below). holders under IFRS to US GAAP, and additional disclosures Commissions are credited to the Business unit with the required under US GAAP. corresponding customer relationship, with revenue-sharing Except where clearly identified, all of UBS’s financial infor- agreements for the allocation of customer revenues where mation presented in this document is presented on a con- several business units are involved in value creation. solidated basis under IFRS. Pages 121 to 142 contain the fi- For internal management reporting purposes and in the nancial statements for the UBS AG Parent Bank – the Swiss results discussion, we measure credit loss using an expected com pany, including branches worldwide, which owns all the loss concept. Expected credit loss reflects the average annual UBS companies, directly or indirectly. The Parent Bank’s fi- costs that are expected to arise from positions in the current nancial statements are prepared in order to meet Swiss regu- portfolio that become impaired. The adjusted expected latory requirements and in compliance with Swiss Banking credit loss reported for each Business Group is the expected Law. Except in those pages, or where otherwise explicitly credit loss on its portfolio plus the difference between credit stated, all references to “UBS” refer to the UBS Group and loss expense and expected credit loss, amortized over a not to the Parent Bank. three-year period (shown as “deferral”). The difference be- All references to 2007, 2006 and 2005 refer to the UBS tween the sum of these adjusted expected credit loss fig- Group and the Parent Bank’s fiscal years ended 31 December ures, which are charged to the Business Groups or units, and 2007, 2006 and 2005. The Financial Statements for the UBS the credit loss expense recorded at Group level for financial Group and the Parent Bank have been audited by Ernst & reporting purposes is reported in Corporate Center. Young Ltd. An explanation of the critical accounting policies Regulatory capital requirements for the Business units are applied in the preparation of our Financial Statements is pro- defined as 10% of BIS risk-weighted assets. To measure vided in the next section. The basis of our accounting is given capital consumption of the Business units, we adjust regula- in Note 1 to the Financial Statements. tory capital for the goodwill and excess intangible assets allocated. Return on allocated regulatory capital is a key per- Standards for management accounting formance indicator for the Investment Bank and the Business Banking Switzerland unit. Our management reporting systems and policies determine The levels of personnel are expressed in terms of full-time the revenues and expenses directly attributable to each busi- equivalents (FTE) and measured as a percentage of the ness unit. The presentation of the business segments reflects standard hours normally worked by permanent full-time UBS’s organizational structure and management responsi- staff. The FTE level cannot exceed 1.0 for any individual. The bilities. Internal charges and transfer pricing adjustments are term personnel comprises all staff and trainees other than reflected in the performance of each business unit. contractors. Inter-business unit revenues and expenses. Revenue- sharing agreements are used to allocate external customer 4 Accounting Standards and Policies Critical accounting policies Critical accounting policies Basis of preparation and selection of policies expected future cash flows or other valuation techniques, using inputs existing at the balance sheet dates. If available, We prepare our Financial Statements in accordance with market observable inputs are applied to valuation models IFRS as issued by the International Accounting Standards (level 2). In cases where market observable inputs are not Board. The application of certain of these accounting prin- available for all significant valuation parameters, they are ciples requires considerable judgment based upon estimates estimated based on appropriate assumptions (level 3). and assumptions that involve significant uncertainty at the Valuation models are used primarily to value derivatives time they are made. Changes in assumptions may have a transacted in the over-the-counter market, including credit significant