Changes in accounting and presentation

UBS Reporting Structure from Third Quarter 2004

Motor-Columbus consolidation

In July, we completed the acquisition of a 20% stake in Motor-Columbus for a total of CHF 377 million. UBS now holds 55.6% of Motor-Columbus, a Swiss holding company whose most significant asset is a 59.2% ownership interest in Atel, a Swiss-based electricity company. UBS thereby became a controlling shareholder in Atel, and we therefore submitted a mandatory takeover offer to all Atel shareholders that expires on 11 August. By 26 July, 90 Atel shares had been tendered, representing a CHF 108,720 increase in the purchase price for UBS.

Given our majority ownership, we will fully consolidate Motor-Columbus in our financial statements in third quarter 2004, showing it as a separate segment. Due to the increased complexity that this consolidation adds to our financial reporting, we have decided to split the commentary of our results into two parts. Beginning in third quarter, we will provide commentary and analysis of the financial businesses – which include all our current business units – and separate reporting on the new Industrial Holdings unit, consisting of Motor-Columbus. In this way we aim for complete continuity in the presentation and analysis of our core businesses.

In 2003, Motor-Columbus (including Atel’s consolidated results) reported net profit of CHF 143 million and operating income of CHF 5,425 million.

The new reporting structure from third quarter 2004 onwards is shown in detail in the graphic above.

Update on IFRS 2 (Share-based Payment)

In February 2004, the International Accounting Standards Board (IASB) issued IFRS 2, Share-based Payment. Effective 1 January 2005, IFRS 2 will govern the accounting of share-based payments (share awards and options). IFRS 2 will require entities to recognize the fair value of share-based payments made to employees as compensation expense, recognized over the service period, which is generally equal to the vesting period.

The standard distinguishes between awards that are settled by distribution of equity instruments (equity-settled) and awards that are settled by distribution of cash or other assets (cash-settled). The fair value of an equity-settled award should be measured at grant date and recognized over the service period based on the best estimate of the number of instruments that will vest. Ultimately, the total expense recognized will be a product of the number of awards that vest and the fair value of the awards at grant date. Cash-settled share-based payment transactions represent liabilities to the Bank. The fair value of the liability must be continually re-measured and recognized pro-rata over the vesting period. Subsequent to vesting and until settlement, the fair value of the liability will be continually re-measured and any changes in value will be recognized directly in the income statement. The cumulative expense recognized should equal the fair value of the liability at the settlement date.

UBS’s option plans will generally be classified as equity-settled under IFRS 2, although there will be certain exceptions. In particular, share plans issued in 2001 and prior will be considered as cash-settled. Share plans issued subsequent to 2001 are generally considered equity-settled, with certain exceptions that generally relate to countries where equity settlement is not permitted.

The new treatment differs from UBS’s current practice in two ways. First, share awards made as part of annual bonuses will be expensed over their vesting period (usually three years), whereas currently UBS expenses such awards in the year of the corresponding performance, aligning them with the revenue produced. Second, options awards will also be expensed over their vesting period, in contrast to the current practice of disclosing the fair value of such awards at grant, without expensing through the income statement. When publishing our third quarter results, we will provide more guidance on the effect of past awards on past and future accounting periods.

The standard must as a minimum be applied retrospectively to all equity-settled awards issued on or after 7 November 2002 that have not vested by 1 January 2005 and all cash-settled awards that are outstanding on 1 January 2005. Entities are permitted to apply the standard to a broader retrospective time-span if the fair value of the corresponding equity awards has been publicly disclosed. Two years of comparative information (2003 and 2004) must be restated for all grants to which the standard is applied. UBS has elected to adopt the standard on a full retrospective basis. This means that we will apply the new requirements of this standard to all prior period awards which, under the new standard, impact any income statement from 2003 onwards. The opening balance of retained earnings on 1 January 2003 will be adjusted for all income statement effects of these awards prior to 2003.

Along with the adoption of IFRS 2, UBS will implement amended IFRS consolidation rules and retrospectively consolidate the trusts that we use to manage our equity compensation plans. These trusts held approximately 22.4 million UBS shares on 30 June 2004 that had been awarded as compensation to UBS employees and not yet distributed. This consolidation will result in an increase in our holdings of treasury shares.

However, this will not result in an equal reduction of shareholders’ equity because IFRS 2 also requires the share premium account to be credited with the total value of share-based compensation expensed but not yet distributed. There will be no impact on Tier 1 Capital.

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