Note 1 Basis of Accounting

UBS AG’s („UBS”) consolidated financial statements („the Financial Statements”) are prepared in accordance with International Financial Reporting Standards (IFRS) and stated in Swiss francs (CHF). These Financial Statements are presented in accordance with IAS 34 „Interim Financial Reporting”. In preparing the interim Financial Statements, the same accounting principles and methods of computation are applied as in the Financial Statements at 31 December 2003 and for the year then ended. These interim Financial Statements should be read in conjunction with the audited Financial Statements included in the UBS Financial Report 2003.

UBS sponsors the formation of companies, which may or may not be directly or indirectly owned subsidiaries, for the purpose of asset securitization transactions and to accomplish certain narrow and well-defined objectives. These companies may acquire assets directly or indirectly from UBS or its affiliates. Some of these companies are bankruptcy-remote entities whose assets are not available to satisfy the claims of creditors of UBS or any of its subsidiaries. Such companies are consolidated in the Financial Statements when the relationship between UBS and the company indicates that it is controlled by UBS.

Changes in Accounting Policies

Financial Instruments
On 1 January 2004, UBS early adopted revised IAS 32 „Financial Instruments: Disclosure and Presentation” and revised IAS 39 „Financial Instruments: Recognition and Measurement” which were applied retrospectively to all financial instruments affected within the context of the two standards with the exception of the guidance relating to derecognition of financial assets and liabilities, which is applied prospectively. As a result of adopting the revised standards, UBS has restated prior period comparative information, as if the revised accounting standards had been in effect since the beginning of 2002, the earliest comparative prior period that will be presented with the audited Financial Statements to be included in the UBS Financial Report 2004.

Revised IAS 32 amends the accounting for certain derivative contracts linked to an entity’s own shares. Physically settled written put options and forward purchase contracts with UBS shares as underlying are recorded as liabilities, where at inception the present value of the obligation under the contract is debited against equity. The liability is subsequently accreted to the settlement amount using the effective interest rate method, thereby recording interest expense over the life of the contract. UBS currently has physically settled written put options linked to own shares that are now accounted for as liabilities. Liabilities of CHF 172 million at 31 March 2004, and CHF 49 million at 31 December 2003 were debited to shareholders’ equity due to written options. The impact on the income statement of all periods presented is insignificant. All other derivative contracts linked to own shares are accounted for as derivative instruments and are carried at fair value on the balance sheet under Positive replacement values or Negative replacement values.

Revised IAS 32 provides that netting is permitted only if, in addition to all other netting conditions, normal settlement is intended to take place on a net basis. In general, that condition is not met for derivative instruments and therefore replacement values are now reported on a gross basis. Replacement values of CHF 165,050 million that were previously offset have been affected and are now reported gross in the 31 December 2003 balance sheet.

Revised IAS 39 permits any financial instrument to be designated at inception, or at adoption of revised IAS 39, as carried at fair value through profit and loss. Upon adoption of revised IAS 39, UBS made that designation for the majority of its compound instruments issued. Previously, UBS separated the embedded derivative from the host contract and accounted for the separated derivative as a trading instrument. These instruments are now carried at fair value in their entirety with changes in fair value recorded in the income statement. The amounts are now included on the balance sheet within the line item Financial liabilities designated at fair value, with amounts of CHF 39,313 million at 31 March 2004 and CHF 35,286 million at 31 December 2003 being reported in that new line.

The guidance governing recognition and derecognition of a financial asset is considerably more complex under revised IAS 39 than previously and requires a multi-step decision process to determine whether derecognition is appropriate. UBS derecognizes financial assets for which it transfers the contractual rights to the cash flows and no longer retains any risk or reward coming from them nor maintains control over the financial assets. The provisions of this guidance were applied prospectively as of 1 January 2004. As a result of the new requirements, certain transactions are now accounted for as secured financing transactions instead of purchases or sales of trading portfolio assets with an accompanying swap derivative. The impact on the
balance sheet is that at 31 March 2004 Loans increased by approximately CHF 5.8 billion, Trading portfolio assets decreased by approximately CHF 4.3 billion, and Due to customers increased by approximately CHF 1.5 billion.

The effect of restating the income statement due to the adoption of revised IAS 32 and 39 on the comparative prior periods is as follows:
For the full years 2003 and 2002, net profit is reduced by CHF 82 million and CHF 24 million respectively. For the fourth and first quarters of 2003, the effect on net profit was a reduction of CHF 49 million and CHF 8 million respectively.

Investment properties
Effective 1 January 2004, UBS changed its accounting policy for investment property from historical cost less accumulated depreciation to the fair value model. All changes in the fair value of investment property are now recognized in the income statement, and depreciation expense is no longer recorded. Investment property is defined as property held exclusively to earn rental income and benefit from appreciation in value. Fair value of investment property is determined
by appropriate valuation techniques employed in the real estate industry, taking into account the specific circumstances for each item.

This change required restatement of the 2002 and 2003 comparative financial years. The effects of the restatement were as follows:
For the full year 2003, net profit was reduced by CHF 64 million and for the full year 2002 net profit was increased by CHF 19 million. For the comparative fourth and first quarter of 2003, the effect on net profit was insignificant.

Credit risk losses incurred on OTC derivatives
Effective 1 January 2004, the method of accounting for credit risk losses incurred on over-thecounter (OTC) derivatives has been changed. All such credit risk losses are now reported in net trading income and are no longer reported in credit loss expense. This change did not affect net profit or earnings per share results. It did, however, affect segment reporting, as losses reported as credit loss expense were previously deferred over a three-year period in the Business Group segment reporting, whereas under the changed method of accounting, losses in trading income are not subject to such a deferral. In the segment report, therefore, losses on OTC derivatives are now reported as they are incurred. This change in accounting method affected to a minor extent certain balance sheet lines at 31 December 2003, which have been restated to conform to the current year presentation. The changed method of accounting had the following impact on the performance before tax of our Business Groups. In 2003, it reduced Wealth Management & Business Banking’s pre-tax performance by CHF 8 million. It raised the Investment Bank’s by CHF 37 million while Corporate Center’s fell by CHF 29 million. In 2002, the changed method lowered the Investment Bank’s pre-tax performance by CHF 28 million and raised Corporate Center’s by CHF 28 million. For the comparative fourth and first quarter of 2003, the effect on net profit was insignificant.

Recently issued accounting standards

IFRS 3 Business Combinations
On 31 March 2004, the International Accounting Standards Board (IASB) issued IFRS 3 Business Combinations, revised IAS 36 Impairment of Assets, and revised IAS 38 Intangible Assets. The new standards are applicable immediately for business combinations that were agreed to on or after 31 March 2004. In all other respects, the standards are effective for the first financial year beginning on or after 31 March 2004.

Under IFRS 3, all business combinations must be accounted for using the purchase method of accounting. The pooling of interests method of accounting for business combinations has been eliminated. Goodwill arising from business combinations entered into on or after 31 March 2004 is not amortized but tested annually for impairment. Goodwill carried on the balance sheet relating to business combinations prior to 31 March 2004 will continue to be amortized until 31 December 2004. Beginning 2005, amortization will cease and all goodwill carried on the balance sheet will be subject to impairment testing. Intangible assets with indefinite useful lives will also be tested for impairment rather than being amortized.

In purchase accounting, IFRS 3 requires that contingent liabilities assumed must be recognized at their estimated fair value. Minority interests have to be recognized at the minority’s share of interest in the fair value of net assets acquired, whereas previously minority interests were recorded at carryover basis. The adoption of the new standards will have a material impact on UBS’s financial statements as goodwill amortization will cease. In 2003, UBS recorded CHF 756 million of goodwill amortization expense.

IFRS 4 Insurance Contracts
On 31 March 2004, the IASB issued IFRS 4 Insurance Contracts, which provides guidance on the accounting and reporting of insurance contracts issued and reinsurance contracts held. The new standard is effective for financial years beginning on or after 1 January 2005 and is relevant to UBS with respect to its life insurance activities. IFRS 4 requires that the deposit component of an insurance policy is unbundled from the insurance component and accounted for separately in accordance with IAS 39. UBS is in the process of evaluating the new standard but does not expect it to have a material impact on its financial statements.

IFRS 5 Non-Current Assets Held for Sale and Discontinued Operations
On 31 March 2004, the IASB issued IFRS 5 Non-Current Assets Held for Sale and Discontinued Operations, which replaces IAS 35 Discontinued Operations. The new standard provides guidance on the measurement and classification of assets „held for sale” and introduces the concept of a „disposal group”. IFRS 5 is effective for financial years beginning on or after 1 January 2005 and is applicable prospectively. Assets or disposal groups classified as held for sale are carried at the lower of their carrying amount and fair value less costs to sell, and are not depreciated. Assets held for sale and assets and liabilities that are part of a disposal group classified as held for sale have to be presented separately on the face of the balance sheet. Operations are classified as discontinued at the time they meet the criteria for being classified as held for sale or when they are disposed of. The results of discontinued operations have to be classified separately on the face of the income statement. UBS is in the process of evaluating the new standard and the impact it may have on its financial statements.

Amendment to IAS 39 Fair Value Hedge Accounting for a Portfolio Hedge of Interest Rate Risk
On 31 March 2004, the IASB issued an amendment to IAS 39 Fair Value Hedge Accounting for a Portfolio Hedge of Interest Rate Risk. The amendment establishes conditions under which an entity is permitted to apply fair value hedge accounting to a portfolio of financial assets or financial liabilities to hedge against interest rate risks. As UBS adopted revised IAS 32 and 39 as of 1 January 2004, the amendment has been adopted with immediate effect. However, the amendment has currently no relevance to UBS as it does not intend to apply this new hedging method.

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