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. The
effect
of applying IFRS 2 is disclosed in Note 1b) to the
Financial
Statements, and further information on UBS equity
compensation plans, including inputs used to determine the
fair value of options, is disclosed in Note 30 to the Financial
Statements.
IFRS 2 requires that share options awarded to employees
are recognized as compensation expense based on their fair
value at grant date. The share options we issue to our
employees
have features that make them incomparable to
options on our shares traded in active markets. Accordingly,
we cannot determine fair value by reference to a quoted
market price, but we rather estimate it using an option valuation
model. The model, a Monte Carlo simulation, requires
inputs such as interest rates, expected dividends, volatility
measures and specific employee exercise behavior patterns
based on statistical data.
Some of the model inputs we use are not market observable
and have to be estimated or derived from available
data. Use of different estimates would produce different option
values, which in turn would result in higher or lower
compensation expense recognized.
Several recognized models for the valuation of options
exist but none can be singled out as the best or most correct.
The model we apply has been selected because it is able to
handle some of the specific features included in the options
granted to our employees. If we were to use a different
model, the option values produced would be different, even
if we used the same inputs.
Using both different inputs and a different valuation
model could have a significant impact on the fair value of
employee share options, which could be either higher or
lower than the values produced by the model we apply and
the inputs we have used.
