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Assumptions on customer behavior, such as lapses, included in the models are derived in the same
way as the assumptions used to measure insurance liabilities.
Impairment offinancial assets
There are a number of significant risks and uncertainties inherent in the process of monitoring in–
vestments and determining if impairment exists. These risks and uncertainties include the risk that the
Group's assessment of an issuer's ability to meet all of its contractual obligations will change based on
changes in the credit characteristics of that issuer and the risk that the economic outlook will be worse
than expected or have more of an impact on the issuer than anticipated . Also, there is a risk that new
information obtained by the Group or changes in other facts and circumstances will lead the Group to
change its investment decision. Any of these situations could result in a charge against the income
statement in a future period to the extent of the impairment charge recorded.
Debt instruments are impaired when it is considered probable that not all amounts due will be col–
lected as scheduled . Factors considered include industry risk factors, financial condition, liquidity po–
sition and near-term prospects of the issuer, nationally recognized credit rating declines and a breach
of contract.
Objective evidence of impairment for an investment in an equity instrument includes information
about significant changes with an adverse effect that have taken place in the technological, market,
economic or legal environment in which the issuer operates , and indicates that the cost of the invest–
ment in the equity instrument may not be recovered . A significant or prolonged decline in the fair
value of an investment in an equity instrument below its cost is also objective evidence of impaiment.
9.3 UBS AG, Annual
Report
2006
Note 1 Summary of Significant Accounting Policies
a) Significant Accounting Policies
4) Recognition and Derecognition of Financial Instruments
UBS recognizes financial instruments on its balance sheet when, and only when, the Group be–
comes a party to the contractual provisions of the instrument.
UBS enters into transactions where it transfers financial assets recognized on its balance sheet but
retains either all risks and rewards of the transferred financial assets or a portion of them. If all or sub–
stantially all risks and rewards are retained, the transferred financial assets are not derecognized from
the balance sheet. Transfers of financial assets with retention of all or substantially all risks and re–
wards include, for example, securities lending and repurchase transactions described under parts
12)
and
13).
They further include transactions where financial assets are sold to a third party with a con–
current total rate of return swap of the transferred assets to retain all their risks and rewards. These
types of transactions are accounted for as secured financing transactions similar to repurchase agree–
ments.
In transactions where substantially all of the risks and rewards of ownership of a financial asset
are neither retained nor transferred, UBS derecognizes the financial asset if control over the asset is
lost. The rights and obligations retained in the transfer are recognized separately as assets and liabili–
ties as appropriate. In transfers where control over the financial asset is retained, the Group continues
to recognize the asset to the extent of its continuing involvement, determined by the extent to which it
is exposed to changes in the value of the transferred asset. Examples of such transactions are transfers
of financial assets involving guarantees, writing put options, acquiring call options, or specific types
of swaps linked to the performance of the asset.
UBS removes a financial liability from its balance sheet when, and only when, it is extinguished
(ie., when the obligation specified in the contract is discharged or cancelled or expires) .