Note 41 Reconciliation of International Financial Reporting Standards (IFRS) to United States Generally Accepted Accounting Principles (US GAAP)

Note 41.1 Valuation and Income Recognition Differences between IFRS and US GAAP

The consolidated financial statements of UBS have been prepared in accordance with IFRS. The principles of IFRS differ in certain respects from United States Generally Accepted Accounting Principles ("US GAAP"). The following is a summary of the relevant significant accounting and valuation differences between IFRS and US GAAP.

a. Purchase accounting (merger of Union Bank of Switzerland and Swiss Bank Corporation)

Under IFRS, the 1998 merger of Union Bank of Switzerland and Swiss Bank Corporation was accounted for under the uniting of interests method. The balance sheets and income statements of the banks were combined, and no adjustments were made to the carrying values of the assets and liabilities. Under US GAAP, the business combination creating UBS AG is accounted for under the purchase method with Union Bank of Switzerland being considered the acquirer. Under the purchase method, the cost of acquisition is measured at fair value and the acquirer's interests in identifiable tangible assets and liabilities of the acquiree are restated to fair values at the date of acquisition. Any excess consideration paid over the fair value of net tangible assets acquired is allocated, first to identifiable intangible assets based on their fair values, if determinable, with the remainder allocated to goodwill.

Goodwill and intangible assets

For US GAAP purposes, the excess of the consideration paid for Swiss Bank Corporation over the fair value of the net tangible assets received has been recorded as goodwill and was amortized on a straight-line basis using a weighted ­average life of 13 years from 29 June 1998 to 31 December 2001.

On 1 January 2002, UBS adopted SFAS 141, Business Combinations and SFAS 142, Goodwill and Other Intangible Assets. SFAS 141 requires reclassification of intangible assets to goodwill which no longer meet the recognition criteria under the new standard. SFAS 142 requires that goodwill and intangible assets with indefinite lives no longer be amortized but be tested annually for impairment. Identifiable intangible assets with finite lives continue to be amortized. Upon adoption, the amortization charges related to the 1998 business combination of Union Bank of Switzerland and Swiss Bank Corporation ceased to be recorded under US GAAP.

In 2006 and 2005, goodwill recorded under US GAAP was reduced by CHF 18 million and CHF 67 million respectively, due to recognition of deferred tax assets of Swiss Bank Corporation which had previously been subject to valuation reserves.

Other purchase accounting adjustments

The restatement of Swiss Bank Corporation's net assets to fair value in 1998 resulted in decreasing net tangible assets by CHF 1,077 million for US GAAP. This amount is being amortized over periods ranging from two years to 20 years.

b. Goodwill

With the adoption of IFRS 3 Business Combinations on 31 March 2004, UBS ceased amortizing goodwill on 1 January 2005 for all goodwill existing before 31 March 2004. Goodwill is now subject to an annual impairment test as it is under US GAAP and is no longer amortized under both sets of standards. Goodwill from business combinations entered into on or after 31 March 2004 was already accounted for under the provisions of IFRS 3, and no goodwill amortization was recorded for these transactions under IFRS or US GAAP. An IFRS to US GAAP difference remains on the balance sheet due to the fact that US GAAP goodwill amortization ceased on 31 December 2001 and IFRS goodwill amortization ceased on 31 December 2004. This difference was reduced during 2005 due to the sale of GAM on 2 December 2005.

In addition on 31 March 2004, UBS adopted revised IAS 38 Intangible Assets. Under the revised standard, intangible assets acquired in a business combination must be ­recognized separately from goodwill if they meet defined recognition criteria. Existing intangible assets that do not meet the recognition criteria have to be reclassified to goodwill. On 1 January 2005, UBS reclassified the trained workforce intangible asset recognized in connection with the ­acquisition of PaineWebber with a book value of CHF 1.0 billion to Goodwill. Under US GAAP, this asset was reclassified from Intangible assets to Goodwill on 1 January 2002 with the adoption of SFAS 142 Goodwill and Other Intangible Assets.

Under IFRS, the cost of the business combination of ­Banco Pactual is estimated at USD 2,194 million (CHF 2,677 million) on 31 December 2006 but is still subject to final determi­nation. Of the total consideration, USD 971 million (CHF 1,164 million) was paid on 1 December 2006 in cash. The residual payment of up to USD 1.6 billion (CHF 1.9 billion) is subject to certain performance conditions and is due on 30 June 2011. 50% (USD 800 million) of the deferred residual payment is contingent upon achieving a specified ­cumulative net income before tax of the acquired business during the period from 1 December 2006 to 30 June 2011. Under US GAAP, contingent consideration which depends on the achievement of a specified earnings level in future periods is not recognized as a cost of the business combination at its present value until the contingency is resolved. For that reason, Goodwill and Other liabilities recognized under US GAAP are reduced by the present value of the contingent consideration of CHF 746 million to CHF 459 million. Accordingly, the addition of accrued interest on the present value of the contingent consideration recognized under IFRS is reversed under US GAAP, which resulted in a decrease of Interest expense and Other liabilities of CHF 3 million.

c. Purchase accounting under IFRS 3 and FAS 141

With the adoption of IFRS 3 on 31 March 2004, the accounting for business combinations generally converged with US GAAP except for the differences described below.

Under IFRS, minority interests are recognized at the percentage of fair value of identifiable net assets acquired at the acquisition date whereas under US GAAP they are recognized at the percentage of book value of identifiable net assets acquired at the acquisition date. In most cases, minority interests would tend to have a higher measurement value under IFRS than under US GAAP.

The accounting treatment of purchased minority interests of a subsidiary differs between IFRS and US GAAP. Under IFRS, UBS records the difference between the purchase price and the carrying value of the acquired minority interest directly in Equity whereas the acquisition of the minority interests is treated as a business combination under US GAAP. In 2006, goodwill of CAD 35 million (CHF 40 million) and intangible assets of CAD 71 million (CHF 79 million) under US GAAP resulted from the purchase of the then outstanding 50% minority interest in a consolidated subsidiary, UBS Bunting. See Note 37 Business Combinations for the IFRS treatment of this acquisition.

Furthermore, IFRS requires that in a step acquisition the existing ownership interest in an entity be revalued to the new valuation basis established at the time of acquisition. The increase in value is recorded directly in equity as a revaluation reserve. Under US GAAP, the existing ownership interest remains at its original valuation.

d. Hedge accounting

Under IAS 39, UBS hedges interest rate risk based on forecast cash inflows and outflows on a Group basis. For this purpose, UBS accumulates information about non-trading financial assets and financial liabilities, which is then used to estimate and aggregate cash flows and to schedule the future periods in which these cash flows are expected to occur. Appropriate derivative instruments are then used to hedge the estimated future cash flows against repricing risk. SFAS 133 does not permit hedge accounting for hedges of future cash flows determined by this methodology. Accordingly, for US GAAP such hedging instruments continue to be carried at fair value with changes in fair value recognized in Net trading income.

In addition, a new hedging methodology, fair value hedge of portfolio interest rate risk, was implemented in 2005 for a specific portfolio of mortgage loans. This new hedging method is not recognized under US GAAP and therefore, the fair value change of hedged items recognized under IFRS is reversed to Net trading income under US GAAP.

Amounts deferred under hedging relationships prior to the adoption of IAS 39 on 1 January 2001 that do not qualify as hedges under current requirements under IFRS are amortized to income over the remaining life of the hedging relationship. Such amounts have been reversed for US GAAP as they have never been treated as hedges.

e. Financial investments available-for-sale

For UBS, the following differences exist between IFRS and US GAAP in accounting for financial investments available-for-sale: 1) Under US GAAP, instruments which are not securities or equity securities with no readily determinable fair value (excluding private equity investments discussed in the next part) are not classified as available-for-sale investments. They are classified as Other assets and measured at cost less impairment. Under IFRS, these instruments are measured at fair value with changes in fair value reflected directly in equity. 2) Under IFRS, restricted stock is classified as a financial investment available-for-sale. Under US GAAP, restricted stock (with a restriction period of more than one year) is classified as Other assets and measured at cost less impairment.

f. Private equity investments

On 1 January 2005, UBS adopted revised IAS 27 Consolidated and Separate Financial Statements and revised IAS 28 Investments in Associates. The comparative periods for 2004 and 2003 were restated. The adoption of these standards had an impact on the accounting for private equity investments. Previously under IFRS, such investments were classified as Financial investments available-for-sale with changes in fair value recorded directly in Equity. The effect of adopting these standards is that private equity investments in which UBS owns a controlling interest are now consolidated and those where UBS has significant influence are accounted for as associated companies using the equity method of accounting. The remaining private equity investments continue to be accounted for as Financial investments available-for-sale.

Under US GAAP, private equity investments held within separate investment subsidiaries are accounted for in accordance with the AICPA Audit and Accounting Guide, Audits of Investment Companies. They are accounted for at fair value with changes in fair value recorded in other income. The remaining private equity investments held by UBS are accounted for at cost less "other than temporary" impairment. All private equity investments are presented in the balance sheet line Private equity investments under US GAAP.

g. Pension and other post-retirement benefit plans

Under IFRS, UBS recognizes post-retirement benefit expense based on a specific method of actuarial valuation used to determine the projected plan liabilities for accrued service, including future expected salary increases, and expected return on plan assets. Plan assets are recorded at fair value and are held in a separate trust to satisfy plan liabilities. Under IFRS, the recognition of a prepaid asset is subject to certain limitations, and any unrecognized prepaid asset is recorded as pension expense. US GAAP does not allow a limitation on the recognition of prepaid assets recorded in the balance sheet.

Under US GAAP, post-retirement benefit expense is based on the same actuarial method of valuation of liabilities and assets as under IFRS. Differences in the amounts of expense and liabilities (or prepaid assets) exist due to different transition date rules, stricter provisions for recognition of prepaid assets under IFRS, and the treatment of the 1998 merger of Union Bank of Switzerland and Swiss Bank Corporation.

In addition, under US GAAP, if the fair value of plan assets falls below the accumulated benefit obligation (which is the current value of accrued benefits without allowance for future salary increases), an additional minimum liability must be shown in the balance sheet. If an additional minimum liability is recognized, an equal amount will be recognized as an intangible asset up to the amount of any unrecognized prior service cost. Any amount not recognized as an intangible asset is reported in other comprehensive income (OCI). This amount was removed from OCI when SFAS 158 Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans was first applied at 31 December 2006. See Note 41.2 for details.

In accordance with SFAS 158, the US GAAP balance sheet at 31 December 2006 shows the funded status of all post-retirement benefit plans under Other liabilities. All amounts not recognized in US GAAP Net profit are recognized in Other comprehensive income (OCI) as an adjustment to the ending balance as of 31 December 2006. The recorded amounts in OCI are subsequently reclassified from OCI on a straight-line basis as those amounts are recognized in the income statement.

Under IFRS, the amount recognized on the balance sheet as a net pension asset or liability is comprised of the funded status of the plans as adjusted for unrecognized actuarial gains and losses and prior service costs and the unrecognized prepaid pension asset. Unrecognized net actuarial gains and losses and prior service costs are subsequently recognized in the income statement on a straight line basis.

h. Equity participation plans

On 1 January 2005, UBS adopted IFRS 2 Share-based payment which requires that the fair value of all share-based payments made to employees be recognized as compensation expense from the date of grant over the service period, which is generally equal to the vesting period. UBS applied IFRS 2 on a retrospective application basis and restated its 2003 and 2004 comparative prior periods for all awards that impact income statements commencing 2003. UBS recorded an opening retained earnings adjustment on 1 January 2003 to reflect the cumulative income statement effects of prior periods. See Note 1b) for details. Previously under IFRS, option awards were expensed at their intrinsic value which is generally zero as options are normally granted at or out of the money. Shares were recognized as compensation expense in full in the performance year, which is generally the year prior to grant.

On 1 January 2005, UBS also adopted SFAS 123 (revised 2004), Share-Based Payment, (SFAS 123-R). SFAS 123-R, like IFRS 2, also requires that share-based payments to employees be recognized in the income statement over the requisite service period based on their fair values at the date of grant. The requisite service period is defined as the period that the employee is required to provide active employment in order to earn their award. This may be different from the service period under IFRS, which is generally equal to the vesting period.

UBS adopted SFAS 123-R using the modified prospective method. Prior periods were not restated. Under this method, compensation cost for the portion of awards for which the service period has not been rendered and that are outstanding (unvested) as of the effective date shall be recognized as the service is rendered on or after the effective date. As such, to the extent that the grant date fair value of shares or options has been previously recognized in the income statement or disclosed in the notes to the financial statements, it should not be re-recognized upon adoption of SFAS 123-R. Prior to the adoption of SFAS 123-R, UBS recognized the fair value of share awards granted as part of annual bonuses in the year of corresponding performance, in alignment with the revenue produced. For disclosure purposes, UBS recognized the fair value of option awards on the date of grant. Thus, for recognition and disclosure purposes, expense for share and option awards issued prior to but outstanding at the date of adoption of SFAS 123-R has been fully attributed to prior periods.

Prior to 1 January 2005, UBS applied the intrinsic value method under APB 25, which was similar to the previous IFRS treatment except that certain share and option plans were deemed variable under US GAAP. Changes in intrinsic value for these variable plans were recorded in US GAAP Net profit. Due to the fact that IFRS 2 was applied on a retrospective basis and SFAS 123-R was applied on a modified prospective basis, for the IFRS to US GAAP reconciliation, the opening IFRS retained earnings adjustment on 1 January 2003 and subsequent IFRS 2 restatement adjustments were reversed and only the awards required to be expensed were recorded in the 2005 US GAAP Financial Statements. Subsequent awards have been recognized over the requisite service periods, which are determined by the terms of the award.

In addition, under the transition provisions of SFAS 123-R, a cumulative adjustment of CHF 38 million expense reversal, net of tax, was recorded in US GAAP Net profit on 1 January 2005. The adjustment mainly relates to the required recognition of estimated forfeitures of share-based compensation awards under SFAS 123-R. The standard requires that expense be recognized only for those instruments where the requisite service is performed. During the service period, compensation cost recognized is based on the estimated number of instruments for which the requisite service is expected to be rendered. That estimate is revised if subsequent information indicates that the actual number is likely to differ from previous estimates.

Under SFAS 123-R, entities are required to continue to provide pro-forma disclosures for the periods in which the fair value method of accounting for share-based compensation was not applied. See Note 42.7 for further information.

Certain UBS awards contain provisions that permit the employee to leave the bank and continue to vest in the award provided they do not perform certain harmful acts against the bank. These are generally referred to as non-compete provisions. Under SFAS 123-R, awards with non-compete provisions generally do not impose a requisite service period, and therefore expense should not be recognized over a future period. UBS has determined that the appropriate expense recognition period for such awards is the performance year, which is generally the period prior to grant. This is consistent with the approach applied under APB 25. Compensation expense for awards with non-compete provisions is generally recognized over the vesting period under IFRS. Certain UBS awards contain provisions that permit the employee to retire, provided they meet certain eligibility conditions and continue to vest in their award. Under US GAAP, compensation expense for such awards must be recognized over the period from grant until the employee reaches retirement eligibility. Under IFRS 2 such awards are generally recognized over the vesting period, with an acceleration of expense at the actual retirement date.

UBS also has employee benefit trusts that are used in connection with share-based payment arrangements and deferred compensation plans. In connection with the issuance of IFRS 2, the IFRIC amended SIC 12 Consolidation – Special Purpose Entities, an interpretation of IAS 27, to eliminate the scope exclusion for equity compensation plans. Therefore, pursuant to the criteria set out in SIC 12, an entity that controls an employee benefit trust (or similar entity) set up for the purposes of share-based payment arrangements will be required to consolidate that trust. UBS consolidated such employee benefit trusts retrospectively to 1 January 2003. For further details on the restatement, see Note 1b). Under US GAAP prior to 1 January 2004, certain equity compensation trusts were already consolidated under US GAAP under the provisions of EITF-97-14, Accounting for Deferred Compensation Arrangements Where Amounts Earned Are Held in a Rabbi Trust and Invested. With the adoption of FASB Interpretation No. 46 Consolidation of Variable Interest Entities (revised December 2003), an interpretation of Accounting Research Bulletin No. 51 (FIN 46-R), on 1 January 2004, the remaining unconsolidated employee equity compensation trusts formed before 1 February 2003 were consolidated for US GAAP purposes for the first time. Thus, from 1 January 2004 onwards, there is no difference between IFRS and US GAAP in regard to these trust consolidations.

With the consolidation of the additional trusts under FIN 46-R from 1 January 2004, UBS re-evaluated its accounting for share-based compensation plans under APB 25 by taking into consideration the settlement methods and activities of the trusts. Based on this review, most share plans issued prior to 2001 were treated as variable awards under APB 25. There were no changes to the accounting for option plans. On 1 January 2004, a CHF 6 million expense reduction was recorded as a cumulative adjustment due to a change in accounting.

Under IFRS, UBS recognizes an obligation and related expense for payroll taxes related to share-based payment transactions over the period that the related compensation expense is recognized. This is generally the vesting period. US GAAP requires recognition of the liability on the date that the measurement of any payment of the tax to the taxing authority is triggered. This is generally the distribution date for share awards and the exercise date of options.

In addition, CHF 1,450 million has been reclassified from Other liabilities to Shareholders' equity in the 31 December 2005 US GAAP balance sheet. The reclassification relates to equity-settled awards which were recorded in Other liabilities.

i. Variable interest entities (VIEs), limited partnerships and entities issuing preferred securities

IFRS and US GAAP generally require consolidation of entities on the basis of controlling a majority of voting rights. However, in certain situations, there are no voting rights, or control of a majority of voting rights is not a reliable indicator of the need to consolidate, such as when voting rights are significantly disproportionate to risks and rewards. There are differences in the approach of IFRS and US GAAP to those situations.

Under IFRS, when control is exercised through means other than controlling a majority of voting rights, the consolidation assessment is based on the substance of the relationship. Indicators of control in these situations include: predetermination of the entity's activities; the entity's activities being conducted on behalf of the enterprise; decision-making powers being held by the enterprise; the right to obtain the majority of the benefits or be exposed to the risks inherent in the activities of the entity; or retaining the majority of the residual or ownership risks related to the entity's assets in order to obtain benefits from its activities.

In most other cases, US GAAP requires that control over an entity be assessed first based on voting interests. If voting interests do not exist, or differ significantly from economic interests, the entity is considered a variable interest entity (VIE) under FASB interpretation No. 46 (revised December 2003) Consolidation of Variable Interest Entities, an interpretation of Accounting Research Bulletin No. 51 (FIN 46-R), and control is assessed based on its variable interests. A discussion of FIN 46-R requirements is set out in Note 42.1.

In most instances, limited partnerships are not consolidated under IFRS because UBS`s legal and contractual rights and obligations do not indicate that UBS has the power to govern the financial and operating policies of these entities and concurrently has the objective to obtain benefits form its activities through this power. Under US GAAP, UBS applies EITF 04-05, Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights (EITF 04-5), provided an entity is not considered a VIE under FIN 46-R. As a result, UBS consolidates some limited partnerships which are not consolidated under IFRS. Under EITF 04-05, a general partner in a limited partnership is presumed to control that limited partnership regardless of the extent of the general partners' ownership interest in the limited partnership. The assessment of whether the rights of the limited partners should overcome the presumption of control by the general partner is a matter of judgment that depends on facts and circumstances. If the limited partners have either (a) the substantive ability to dissolve (liquidate) the limited partnership or otherwise remove the general partner without cause or (b) substantive participating rights, the general partner does not control the limited partnership and therefore does not consolidate the entity.

The entities consolidated for US GAAP purposes at 31 December 2006, which were not otherwise consolidated in UBS's primary consolidated Financial Statements under IFRS, are mostly investment fund products and securitization VIEs. These are discussed in more detail in Note 42.1.

The entities not consolidated for US GAAP purposes at 31 December 2006, which UBS consolidates under IFRS, are certain entities which have issued preferred securities. Under IFRS such securities are equity instruments held by third parties and are treated as minority interests, with dividends paid also reported in Equity attributable to minority interests; the UBS-issued debt held by these entities and the respective interest amounts are eliminated in the Group Financial Statements. Under US GAAP, these entities are not consolidated, and the UBS-issued debt is recognized as a liability in the Group Financial Statements, with interest paid reported in Interest expense.

A discussion of FIN 46-R measurement requirements and disclosures is set out in Note 42.1.

j. Financial assets and liabilities designated at fair value through profit or loss

IFRS provides, under certain circumstances, the option to designate at initial recognition a financial asset or financial liability at fair value through profit or loss (see Notes 1, 9 and 19). This option is not available under US GAAP as UBS did not early adopt SFAS 155 Accounting for Certain Hybrid Instruments, an amendment of FASB Statements No. 133 and 140 (see Note 41.2). SFAS 155 will allow a fair value designation for certain hybrid instruments from 1 January 2007 onwards. Additionally, beginning 1 January 2008, Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Liabilities (Statement 159) will become effective. Statement 159 provides a fair value option that is broader than that provided in Statement 155 and is similar to the fair value option provided by IFRS. In 2006, as in prior periods, UBS reversed all IFRS fair value desig­nations of financial assets and financial liabilities under US GAAP.

UBS applies the fair value option to a significant portion of its issued debt under IFRS. Many debt issues are in the form of hybrid instruments, consisting of a debt host with an embedded derivative. These hybrid instruments are carried in their entirety at fair value with all changes in fair value recorded in Net trading income. Under US GAAP, the debt host contracts of these hybrid instruments are recognized at amortized cost while the embedded derivatives are recognized at fair value with changes in fair value recognized in Net profit. Although separately measured, the positive and negative replacement values of the embedded derivatives are classified with the debt host contract.

k. Physically settled written puts on UBS shares

Under IFRS, the accounting for physically settled written put options on UBS shares is as follows: the present value of the contractual amount is recorded as a financial liability, while the premium received is credited to equity. Subsequently, the liability is accreted over the life of the put option to its contractual amount recognizing interest expense in accordance with the effective interest method. Under US GAAP, physically settled written put options on UBS shares are accounted for as derivative instruments. All other outstanding derivative contracts, except written put options with the UBS share as underlying, are treated as derivative instruments under both sets of accounting standards.

l. Investment properties

In the IFRS Financial Statements, investment properties are accounted for under the fair value method. Under this method, changes in fair value are recognized in the income statement, and depreciation is no longer recognized. Under US GAAP, investment properties continue to be carried at cost less accumulated depreciation.

Note 41.2 Recently Issued US Accounting Standards

In June 2005, the FASB ratified the consensus on EITF Issue No. 04-5, Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights (EITF 04-5), which provides guidance in determining whether a general partner controls a limited partnership. EITF 04-5 stipulates that the general partner in a limited partnership is presumed to control that limited partnership unless the limited partners have either substantive kick-out rights or substantive participating rights. EITF 04-5 is effective after 29 June 2005 for new limited partnership agreements and for pre-existing limited partnership agreements that are modified; otherwise, the guidance was effective as of 1 January 2006 for existing unmodified partnerships. Adoption of EITF 04-05 did not have a material impact on UBS's Financial Statements.

As part of its convergence efforts with the IASB, the FASB issued Statement No. 154, Accounting Changes and Error Corrections – a Replacement of APB Opinion No. 20 and FASB Statement No. 3 (Statement 154) in May 2005. Statement 154 changes the requirements for the accounting and reporting of a change in accounting principle and applies to all voluntary changes in accounting principle as well as to changes required by an accounting pronouncement that does not include specific transition provisions. Statement 154 requires retrospective application to prior periods' financial statements of a voluntary change in accounting principle unless it is impracticable, whereas Opinion 20 previously required that the cumulative effect of most voluntary changes in accounting principle be recognized in the net income of the period of the change. Statement 154 was effective for accounting changes and corrections of errors made in fiscal years beginning after 15 December 2005. Adoption of Statement 154 did not have a material impact on UBS's Financial Statements.

In April 2006, the FASB issued FASB Staff Position FIN 46(R)-6, Determining the Variability to Be Considered in Applying FASB Interpretation No. 46(R) (FSP FIN 46(R)-6). FSP FIN 46(R)-6 addresses the application of FIN 46(R), Consolidation of Variable Interest Entities, in determining whether certain contracts or arrangements with a variable interest entity (VIE) are variable interests by requiring companies to base its evaluation on an analysis of the VIE's purpose and design, rather than on its legal form or accounting classification. FSP FIN 46(R)-6 was effective for all newly created VIEs or for those that must be re-analyzed under FIN 46(R) as of 1 July 2006. Adoption of FSP FIN 46(R)-6 did not have a material impact on UBS's Financial Statements.

In September 2006, the FASB issued Statement No. 158, Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans (Statement 158). Statement 158 requires: (1) recognition of the over- or under-funded status of a defined benefit post-retirement plan as an asset or liability in the balance sheet; (2) recognition within shareholders equity (net of tax) of gains or losses and prior service costs or credits arising during the period that are not recognized as components of the period's net periodic benefit cost; and (3) measurement of the defined benefit plan assets and obligations as of the date of the employer's fiscal year-end balance sheet. The recognition requirements of Statement 158 (requirements (1) and (2), above) are effective as of the end of the fiscal year ending after 15 December 2006. See Note 42.5 for the incremental effect of the first time application of these requirements. The requirement to measure plan assets and benefit obligations as of the date of the employer's fiscal year end is effective for fiscal years ending after 15 December 2008. Adoption of this requirement will not have an impact on UBS's Financial Statements as plan assets and benefit obligations are currently measured as of the balance sheet date.

Recently issued US accounting standards not yet adopted

In February 2006, the FASB issued Statement of Financial Accounting Standard No. 155, Accounting for Certain Hybrid Instruments, an amendment of FASB Statements No. 133 and 140 (Statement 155). Statement 155 permits UBS to elect to measure any hybrid financial instrument at fair value, with changes in fair value recognized in net profit, if the hybrid instrument contains an embedded derivative that would otherwise require bifurcation under Statement 133. The election to measure the hybrid instrument at fair value is made on an instrument-by-instrument basis and is irreversible. Statement 155 is effective after the beginning of an entity's first fiscal year that begins after 15 September 2006, with early adoption permitted in certain circumstances. At adoption of Statement 155, any difference between the total carrying amount of the individual components of an existing hybrid instrument and the fair value of the combined hybrid financial instrument is recognized as a cumulative-effect adjustment to beginning retained earnings. UBS did not elect to early adopt Statement 155 and, therefore, will adopt the new standard as of 1 January 2007. On a US GAAP basis, it is anticipated that the cumulative-effect adjustment to beginning retained earnings resulting from the adoption of Statement 155 will be a decrease to retained earnings of approximately CHF 414 million (before tax). Financial assets designated at fair value and Financial liabilities designated at fair value are estimated to be approximately CHF 4,125 million and CHF 151,440 million on a US GAAP basis on 1 January 2007.

In March 2006, the FASB issued Statement of Financial Accounting Standard No. 156, Accounting for Servicing of Financial Assets, (Statement 156). Statement 156 addresses the accounting for recognized servicing assets and servicing liabilities related to certain transfers of the servicer's financial assets and for acquisitions or assumptions of obligations to service financial assets that do not relate to the financial assets of the servicer and its related parties. Statement 156 requires that all recognized servicing assets and servicing liabilities are initially measured at fair value and subsequently measured at either fair value or by applying an amortization method for each class of recognized servicing assets and servicing liabilities. Statement 156 is effective in fiscal years beginning after 15 September 2006. The adoption of SFAS 156 is not expected to have a material impact on UBS's Financial Statements.

In June 2006, the FASB issued FIN 48, Accounting for Uncertainty in Income Taxes – an interpretation of SFAS 109, which prescribes a recognition threshold and measurement attribute for financial statement recognition and measurement of a tax position. FIN 48 is effective for years commencing after 15 December 2006. UBS is continuing to evaluate the impact of FIN 48 on its Financial Statements. However, UBS does not expect FIN 48 to have a material effect on its financial position or results of operations.

On 15 September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements (Statement 157). Statement 157 defines fair value, establishes a framework for measuring fair value, and expands the required disclosures about an entity's fair value measurements. Additionally, Statement 157 eliminates the requirement to defer calculated profit or loss on transaction values that include unobservable inputs ("Day 1 profit and loss") and eliminates the use of block discounts for securities traded in an active market. Statement 157 is effective for financial statements issued for fiscal years beginning after 15 November 2007. The provisions of Statement 157 should be applied prospectively upon initial adoption, except for the provisions that eliminate prior measurement guidance regarding block discounts and Day 1 profit or loss. Those changes should be applied retrospectively as an adjustment to the opening balance of retained earnings in the period of adoption. UBS is still assessing the impact Statement 157 will have on its Financial Statements.

In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, The Fair Value Option for ­Financial Assets and Liabilities (Statement 159). This new standard permits entities to irrevocably choose to measure many financial instruments and certain other items at fair value. Unrealized gains and losses on items for which the fair value option has been elected are recognized in net profit at each subsequent reporting date. The election in Statement 159 is similar, but not identical, to the fair value option in IAS 39. The fair value option in IAS 39 is subject to certain qualifying criteria not included in this standard, and it applies to a slightly different set of instruments. Statement 159 is effective for fiscal years beginning after 15 November 2007. Early adoption is permitted only if the provisions of Statement 157 are also applied. UBS is currently assessing the impact ­Statement 159 will have on its Financial Statements.

Note 41.4 Earnings per share

Under both IFRS and US GAAP, basic earnings per share ("EPS") is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding. Diluted EPS includes the determinants of basic EPS and, in addition, gives effect to dilutive potential common shares that were outstanding during the period.

The computations of basic and diluted EPS for the years ended 31 December 2006, 31 December 2005 and 31 December 2004 are presented in the following table.

Note 41.5 Presentation Differences between IFRS and US GAAP

In addition to the differences in valuation and income recognition, other differences exist between IFRS and US GAAP which generally have an impact solely on balance sheet and/or Income statement presentation, although in certain cases, these presentation differences may result in an immaterial impact on US GAAP Shareholders' equity and Net profit. In such cases, these differences are aggregated in the Other differences line in the table in Note 41.3. The following is a summary of these differences.

1. Settlement date vs. trade date accounting

UBS's transactions from securities activities are recorded under IFRS on the settlement date. This results in recording a forward transaction during the period between the trade date and the settlement date. Forward positions relating to trading activities are revalued to fair value, presented as replacement value on balance sheet and any unrealized profits and losses are recognized in Net profit.

Under US GAAP, trade date accounting is required for spot purchases and spot sales of securities. Therefore, all such transactions with a trade date on or before the balance sheet date and with a settlement date after the balance sheet date have been recorded at trade date for US GAAP. This has resulted in receivables and payables to broker-dealers and clearing organizations recorded in Other assets and Other liabilities in the US GAAP balance sheet.

2. Securities received as collateral in a securities-for-securities lending transaction

When UBS acts as the lender in a securities lending agreement and receives securities as collateral that can be pledged or sold, it recognizes the securities received and a corresponding obligation to return them. These securities are reflected on the US GAAP balance sheet in the asset line Securities received as collateral. The offsetting liability is presented in the line Obligation to return securities received as collateral.

3. Reverse repurchase, repurchase, securities borrowing and securities lending transactions

UBS enters into certain types of reverse repurchase, repurchase, securities borrowing and securities lending transactions that result in a difference between IFRS and US GAAP. Under IFRS, they are considered financing transactions which do not result in the recognition of the borrowed financial assets or derecognition of the financial assets lent. The cash collateral received or delivered in such transactions is reflected in the balance sheet with a corresponding receivable or obligation to return it. Under US GAAP, however, certain transactions are considered purchase and sale transactions due to the fact that the contracts do not meet specific requirements, including those related to collateral or margining or the repurchase of the transferred securities is not before maturity of these securities. Due to the different treatment of these transactions under IFRS and US GAAP, interest income and expense recorded under IFRS is reclassified to Net trading income for US GAAP. Additionally under US GAAP, the securities received are recognized on the balance sheet as a spot purchase (Trading portfolio assets or Trading portfolio assets pledged as collateral) with a corresponding forward sale transaction (Replacement values) and a receivable (Cash collateral on securities borrowed) is reclassified, as applicable. The securities delivered are recorded as a spot sale, which means that the securities are derecognized if they are on-balance sheet securities or recorded as a short sale if the delivered securities are off-balance sheet securities (Trading portfolio liabilities). Additionally, a corresponding forward repurchase transaction (Replacement values) and a liability (Cash collateral on securities lent) is reclassified, as applicable.

Securities borrowing transactions with the clients' pool are generally done without providing collateral. UBS pays a fee to the client in such transactions. Under IFRS, the borrowed securities are not recognized on balance sheet but disclosed in a separate line in Note 24 Pledgeable Off-Balance Sheet Securities. Under US GAAP, the borrowed securities are recognized in Trading portfolio assets and Trading portfolio assets pledged as collateral, as applicable, and the obligation to return the securities, which represents a hybrid instrument, is included in Negative replacement values. Effects on net profit which arise from derecognition/ recognition of financial assets and related recognition of forward transactions are reflected in the Net trading income.

4. Recognition / derecognition of financial assets

The guidance governing recognition and derecognition of a financial asset requires a multi-step decision process to determine whether recognition or derecognition of transferred financial assets 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. As a result of these requirements, certain transactions are accounted for as secured financing transactions instead of purchases or sales of trading portfolio assets with an accompanying swap derivative. Under US GAAP, these transactions typically continue to be shown as purchases and sales of trading portfolio assets and were reclassified accordingly. Effects on net profit which arise from derecognition / recognition of financial assets and related recognition of forward transactions are reflected in Net trading income.

Note 41.6 Consolidated Income Statement

The following is a Consolidated Income Statement of the Group, for the years ended 31 December 2006, 31 December 2005 and 31 December 2004, restated to reflect the impact of valuation and income recognition differences and presentation differences between IFRS and US GAAP.

Note 41.7 Condensed Consolidated Balance Sheet

The following is a Condensed Consolidated Balance Sheet of the Group, as of 31 December 2006 and 31 December 2005, restated to reflect the impact of valuation and income recognition principles and presentation differences between IFRS and US GAAP.

Note 41.8 Comprehensive Income

Comprehensive income under US GAAP is defined as the change in shareholders' equity excluding transactions with shareholders. Comprehensive income has two major components: Net profit, as reported in the income statement, and Other comprehensive income (OCI). OCI includes foreign currency translation adjustments and changes in unrealized gains / losses on available-for-sale securities. In addition, up to 31 December 2006, OCI included adjustments to the additional minimum pension liability, which as of 31 December 2006 has been eliminated to reflect that a minimum pension liability is no longer recognized under US GAAP. However, as a result of the adoption of SFAS 158 as discussed in Note 41.1.g, OCI now includes changes in gains or losses and prior service costs or credits relating to post-retirement benefit plans that have not been recognized as components of net periodic pension costs. The components and Accumulated other comprehensive income amounts on a US GAAP basis for the years ended 31 December 2006, 31 December 2005 and 31 December 2004 are as follows: