242 / 488
Chapter
24 /
Financial Instruments: Presentation
(l A S
32)
233
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).