SEC Form 20-F - Deutsche Bank Annual Report 2012

Deutsche Bank Notes to the Consolidated Financial Statements F-21
Annual Report 2010 on Form 20-F 01 – Significant Accounting Policies
To the extent that assets categorized as loans are repaid, restructured or eventually sold and the amount
received is less than the carrying value at that time, then a loss would be recognized in the consolidated
statement of income as a component of the provision for credit losses, if the loan is impaired, or otherwise in
other income, if the loan is not impaired.
Determination of Fair Value
Fair value is defined as the price at which an asset or liability could be exchanged in a current transaction
between knowledgeable, willing parties, other than in a forced or liquidation sale. The fair value of instruments
that are quoted in active markets is determined using the quoted prices where they represent those at which
regularly and recently occurring transactions take place. The Group uses valuation techniques to establish the
fair value of instruments where prices quoted in active markets are not available. Therefore, where possible,
parameter inputs to the valuation techniques are based on observable data derived from prices of relevant
instruments traded in an active market. These valuation techniques involve some level of management estimation
and judgment, the degree of which will depend on the price transparency for the instrument or market and the
instrument’s complexity. Refer to Note 02 “Critical Accounting Estimates – Fair Value Estimates – Methods of
Determining Fair Value” for further discussion of the accounting estimates and judgments required in the
determination of fair value.
Recognition of Trade Date Profit
If there are significant unobservable inputs used in the valuation technique, the financial instrument is recognized
at the transaction price and any profit implied from the valuation technique at trade date is deferred.
Using systematic methods, the deferred amount is recognized over the period between trade date and the date
when the market is expected to become observable, or over the life of the trade (whichever is shorter). Such
methodology is used because it reflects the changing economic and risk profile of the instrument as the market
develops or as the instrument itself progresses to maturity. Any remaining trade date deferred profit is
recognized in the consolidated statement of income when the transaction becomes observable or the Group
enters into off-setting transactions that substantially eliminate the instrument’s risk. In the rare circumstances
that a trade date loss arises, it would be recognized at inception of the transaction to the extent that it is
probable that a loss has been incurred and a reliable estimate of the loss amount can be made. Refer to Note
02 “Critical Accounting Estimates – Fair Value Estimates – Methods of Determining Fair Value” for further
discussion of the estimates and judgments required in assessing observability of inputs and risk mitigation.
Derivatives and Hedge Accounting
Derivatives are used to manage exposures to interest rate, foreign currency, credit and other market price risks,
including exposures arising from forecast transactions. All freestanding contracts that are considered derivatives
for accounting purposes are carried at fair value on the consolidated balance sheet regardless of whether they
are held for trading or nontrading purposes.
Gains and losses on derivatives held for trading are included in net gains (losses) on financial assets/liabilities
at fair value through profit or loss.