Critical accounting policies

Deferred tax assets arise from a variety of sources, the most significant being: a) tax losses that can be carried forward to be utilized against profits in future years; and b) expenses recognized in the books but disallowed in the tax return until the associated cash flow occurs.

UBS records a valuation allowance to reduce its deferred tax assets to the amount which can be recognized in line with the relevant accounting standards. The level of deferred tax asset recognition is influenced by management’s assessment of UBS’s future profitability profile. At each balance sheet date, existing assessments are reviewed and, if necessary, revised to reflect changed circumstances. In a situation where recent losses have been incurred, the relevant accounting standards require convincing evidence that there will be sufficient future profitability.

At 31 December 2008, recognized deferred tax assets amount to CHF 8.9 billion. Recognized deferred tax assets include an amount related to tax loss carry-forwards of CHF 8.1 billion, mainly relating to tax losses incurred in UBS AG, Switzerland, that can be utilized to offset taxable income in Switzerland in future years. The losses mainly resulted from the write-down of investments in US subsidiaries. At 31 December 2007, recognized deferred tax assets amounted to CHF 3.2 billion.

Swiss tax losses can be carried forward for seven years. The deferred tax assets recognized at 31 December 2008 have been based on future profitability assumptions over a five year horizon. The level of assets recognized may, however, need to be adjusted in the future in the event of changes to those profitability assumptions. Refer to Note 22 for further details.

Source: Annual report 2008, section Financial information