IFRS PRACTICAL IMPLEMENTATION GUIDE AND WORKBOOK

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Chapter 24 / Financial Instruments: Presentation (l A S 32)

5.2 DRS AG, Annual Rep ort 2006

Note 1 Summary of Significant Accounting Policies a) Significant Accounting Policies 20) Debt issued

Debt instruments with embedded derivatives that are related to UBS AG shares or to a derivative instrument that has UBS AG shares as its underlying are separated into a liability and an equity component at issue date if they require physical settlement. When the hybrid debt instrument is is– sued, a portion of the net proceeds is allocated to the debt component based on its fair value. The de– termination of fair value is generally based on quoted market prices for UBS debt instruments with comparable terms. The debt component is subsequently measured at amortized cost. The remaining amount of the net proceeds is allocated to the equity component and reported in Share premium . Sub– sequent changes in fair value of the separated equity component are not recognized. However, if the hybrid instrument or the embedded derivative related to UBS AG shares is to be cash settled or if it contains a settlement alternative. then the separated derivative is accounted for as a trading instrument, with changes in fair value recorded in Net trading income unless the entire hybrid debt instrument is designated at fair value through profit or loss with changes in fair value of the entire hybrid instrument also reflected in Net trading income (see part 7).