Changes to reporting structure and presentation in 2006 and other adjustments

Dillon Read Capital Management (DRCM)

On 5 June 2006, we transferred the principal finance and credit arbitrage and commercial real estate businesses in the fixed income, rates and currencies area of the Investment Bank to Global Asset Management. The business, now called Dillon Read Capital Management (DRCM), manages alter­native investment vehicles on behalf of the Investment Bank. Towards the end of 2006, it launched its first outside investor fund. The Investment Bank continues to record the trading revenues generated by the assets managed by DRCM on its fixed income, rates and currencies revenues line. DRCM personnel and general and administrative expenses are booked in Global Asset Management. DRCM charges the Investment Bank for providing investment management ­services. Those charges and expenses are reported in the "Services to / from other business units" line. This arrangement, also shown in the diagram below, has no impact on UBS's consolidated financial results.

Prime Brokerage

Our prime brokerage activities have, until now, been treated differently in the United Kingdom than they have in the United States. Transactions in the US prime brokerage business were booked as a secured loan balance in the Due to / from customer line, whereas in the United Kingdom they were treated as a securities borrowing / lending activity. Even though there is no regulatory guidance on how to present this particular business activity, we have decided to start ­reporting it consistently in all locations. In the future, we will report all of the transactions in the prime brokerage business as a secured loan in the Due to / from customer line in our ­balance sheet. This treatment best reflects most of the business activity in prime brokerage and the market's understanding of the business – which is to provide financing ­facilities to clients from which they can obtain custody and brokerage facilities, exposure to credit and interest rate derivatives and exposure to other financial instruments that the Investment Bank can provide.

To reflect the changes, we have restated our consolidated financial statements and the segment reporting of business units affected for all prior periods. The figures and results presented in this report are based on restated numbers. While the restatement affected certain interest income and interest expense components, it did not have an impact on UBS's income statement, its internal measures of credit exposure, or its regulatory capital.

Obligations to employees

UBS has adjusted its opening balance sheet per 1 January 2002 to reflect obligations for untaken holidays of employees, sabbatical leave and service anniversary awards. The retained earnings for each full-year and interim period from 2002 to 2006 are affected by the same adjustment, which reduces the equity attributable to UBS shareholders by CHF 309 million. This has led to a recalculation of return on equity, which is reflected in the current ratio and all past ones published since 2002. Additional information is available in note 1 to the financial statements.

Changes to accounting

At the start of 2006, we implemented accounting changes based on the revised IAS 39 Financial Instruments: Recog­nition and Measurement; Amendment to the Fair Value ­Option. All financial instruments designated at fair value through profit or loss on 31 December 2005 continued to qualify for the use of the fair value option under the revised fair value option and we did not apply the fair value option to any previously recognized financial asset or financial liability for which the fair value option was not adopted under former guidance. Because of this, the adoption of the revised standard did not have any effect on our financial statements on the transition date, 1 January 2006.

Until the beginning of 2006, we had mainly applied the fair value option to hybrid debt instruments. Starting in second quarter, in line with the revised fair value option, we also applied the fair value option to certain new loans and loan commitments made by the Investment Bank, which are ­substantially hedged with credit derivatives. By adopting this option, we reduce temporary profits and losses caused by the previous and different accounting treatments of the loans and loan commitments and the hedging credit derivatives (refer to Notes 1, 9 and 19 in the Financial Statements section). In second half 2006, we additionally applied the fair value option to certain hybrid instruments resulting from structured repurchase and reverse repurchase agreements and to a hedge fund investment which is part of a portfolio managed on a fair value basis.

Changes in presentation in our credit risk disclosure

We have stopped reporting non-performing loans as a key per­formance indicator for the Investment Bank and Business Banking Switzerland in our 2006 Financial Report. We will also stop disclosing them in quarterly reports from first quarter 2007. The disclosure and discussion of the impaired lending portfolio, which is a key component of our internal credit risk management and control processes, will continue. As in previous years, non-performing loans, as defined under Swiss Federal Banking Commission (SFBC) regulation, will be reported in the notes to the annual financial statements.

Other new disclosures

We have made some minor enhancements to our disclosure in 2006 as part of our continuing effort to improve the transparency of our financial reporting and provide the best possible understanding of our business.

In first quarter 2006, we changed the name of our adjusted regulatory capital performance indicator to "allocated regulatory capital". The new term more accurately reflects the fact that capital is actually allocated to the Business Groups based on risk-weighted assets, goodwill and excess intangible assets.

In our US wealth management business, the calculation of revenues includes net goodwill funding as acquisition costs are no longer disclosed separately when discussing ­results.