Notes to the Parent Bank financial statements

Accounting Policies

The Parent Bank Financial Statements are prepared in accordance with Swiss Federal banking law. The accounting policies are principally the same as for the Group Financial Statements outlined in Note 1, Summary of Significant Accounting Policies. Major differences between the Swiss Federal banking law requirements and International Financial Reporting Standards (IFRS) are described in Note 40 to the financial statements. The accounting policies applied for the statutory accounts of the Parent Bank are discussed below. The risk management of UBS AG is described in the context of the risk management for UBS Group. For the statutory required risk assessment refer to the "Risk and treasury management" section of this report.

Treasury shares

Treasury shares are own equity instruments held by an entity. Under Swiss law, treasury shares are recognized in the balance sheet as trading balances. Short positions in treasury shares are recognized in Due to banks. Treasury shares recognized as ­trading balances and short positions in treasury shares are ­measured at fair value with unrealized gains or losses from ­remeasurement to fair value included in the income statement. Realized gains and losses on the sale or acquisition of treasury shares are recognized in the income statement.

A reserve for own shares must be created in equity equal to the cost value of the treasury shares held. The reserve for own shares is not available for distribution to shareholders.

Foreign currency translation

Assets and liabilities of foreign branches are translated into CHF at the spot exchange rate at the balance sheet date. Income and expense items are translated at weighted average exchange rates for the period. Gains resulting from ­exchange differences on the translation of each of these ­foreign branches are credited to a provision account (other liabilities). Losses resulting from exchange differences are debited, firstly, to the aforementioned provision account ­until such provision is fully utilized, and, secondly, to profit and loss.

Investments in associated companies

Investments in associated companies are equity interests which are held for the purpose of the Parent Bank's business activities or for strategic reasons. They include all directly held subsidiaries and are carried at cost less impairment, if applicable.

Deferred taxes

Deferred tax assets are not recognized in the Parent Bank Financial Statements. Deferred tax liabilities are recognized for all taxable temporary differences. The change in the deferred tax liability is recognized in profit or loss.

Equity participation and other compensation plans

Equity participation plans

Under Swiss law, employee share awards are recognized as compensation expense and accrued over the performance year, which is generally the period prior to the grant date. Employee option awards which do not contain voluntary ­termination non-compete provisions are recognized as ­compensation expense on the grant date. If the award is performance based and contains substantive future service / vesting period, compensation expense is recognized over the performance period. Employee option awards which contain voluntary termination non-compete provisions (i. e. good leaver clause) are recognized as compensation expense over the performance year. Equity- and cash-settled awards are classified as liabilities. The employee share option awards are remeasured to fair value at each balance sheet date. However, for employee share options that UBS intends to settle in shares from condi­tional capital, there is no impact on the income statement and no liability is recognized. Upon exercise of employee options, cash received for payment of the strike price is credited against share capital and general statutory reserve.

Other compensation plans

Fixed and variable deferred cash compensation is recognized as compensation expense over the performance year. If the award is performance based and contains substantive future service / vesting period, compensation expense is recognized over the performance period.

Changes in accounting policies, comparability and other adjustments

Equity participation plans

In 2008, UBS revised the measurement methodology for the liability under employee share option awards settled with treasury shares. The measurement of the liability was previously based on the higher of grant date fair value and intrinsic value of the underlying options, whereas following the revision, it is based on fair value. This change resulted in revenues of CHF 1.2 billion.

In 2006, UBS adopted the policy to decide at grant whether to use conditional capital or treasury shares to satisfy employee option delivery obligations in UBS shares. In 2008, UBS changed this policy to allow it to use treasury shares up to the number of treasury shares held, with the excess of employee option delivery obligations satisfied from conditional capital. As a result, UBS recognized an additional expense of CHF 298 million before tax in the income statement in 2008.

Post-employment benefits

In 2008, UBS concluded that it meets the requirements to recognize a defined benefit asset associated with its Swiss pension plan consistent with the consolidated financial statements. The change in accounting policy resulted in the following effects on the balance sheet and income statement for 31 December 2008: an increase of approximately CHF 2.1 billion in Other assets and a corresponding decrease in Personnel expenses.

Reclassification of trading securities

UBS decided at the end of October to reclassify securities from "trading balances in securities and precious metals" to ­"financial investments" with effect from 1 October 2008. The securities have been reclassified on the basis of their fair value on the reclassification date and are now accounted for on an amortized cost basis. An impairment charge of CHF 0.3 billion was recognized on the reclassified financial in­struments. If the reclassification had not occurred, the impairment charge would not have been recognized but a trading loss of CHF 1.9 billion would have been recorded.