Annual Report 2009 on Form 20-F (PDF) - Deutsche Bank Annual ...

Management Judgment: In reaching estimates of fair value management judgment needs to be exercised.
The areas requiring significant management judgment are identified, documented and reported to senior
management as part of the valuation control framework and the standard monthly reporting cycle. The specialist
model validation and valuation groups focus attention on the areas of subjectivity and judgment.
The level of management judgment required in establishing fair value of financial instruments for which there
is a quoted price in an active market is minimal. Similarly there is little subjectivity or judgment required for
instruments valued using valuation models which are standard across the industry and where all parameter
inputs are quoted in active markets.
The level of subjectivity and degree of management judgment required is more significant for those instruments
valued using specialized and sophisticated models and where some or all of the parameter inputs are
not observable. Management judgment is required in the selection and application of appropriate parameters,
assumptions and modeling techniques. In particular, where data is obtained from infrequent market transactions
then extrapolation and interpolation techniques must be applied. In addition, where no market data is
available then parameter inputs are determined by assessing other relevant sources of information such as
historical data, fundamental analysis of the economics of the transaction and proxy information from similar
transactions and making appropriate adjustment to reflect the actual instrument being valued and current
market conditions. Where different valuation techniques indicate a range of possible fair values for an instrument
then management has to establish what point within the range of estimates best represents fair value.
Further, some valuation adjustments may require the exercise of management judgment to ensure they
achieve fair value.
Fair Value Hierarchy
The financial instruments carried at fair value have been categorized under the three levels of the IFRS fair
value hierarchy as follows:
Quoted Prices in an Active Market (Level 1): This level of the hierarchy includes listed equity securities on
major exchanges, quoted corporate debt instruments, G7 Government debt and exchange traded derivatives.
The fair value of instruments that are quoted in active markets are determined using the quoted prices where
they represent those at which regularly and recently occurring transactions take place.
Valuation Techniques with Observable Parameters (Level 2): This level of the hierarchy includes the majority
of the Group’s OTC derivative contracts, corporate debt held, securities purchased/sold under resale/
repurchase agreements, securities borrowed/loaned, traded loans and issued structured debt designated
under the fair value option.
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