Critical accounting policies

We prepare our Financial Statements in accordance with IFRS, and provide a reconciliation to generally accepted accounting principles in the United States (US GAAP).

Financial assets and financial liabilities in our trading portfolio, financial assets and liabilities designated at fair value and derivative instruments are recorded at fair value on the balance sheet.

A closely related issue to determining fair value of financial instruments is the recognition of deferred day 1 profit or loss.

UBS sponsors the formation of Special Purpose Entities (SPEs) primarily to allow clients to hold investments in separate legal entities, to allow clients to jointly invest in alternative assets, for asset securitization transactions and for buying or selling credit protection.

IFRS 2 Share-based Payments addresses the accounting for share-based employee compensation and was adopted by UBS on 1 January 2005 on a fully retrospective basis.

We record a valuation allowance to reduce our deferred tax assets to the amount which can be recognized in line with the relevant accounting standards.