entire - Deutsche Bank Annual Report 2012

Deutsche Bank 02 – Consolidated Financial Statements 243
Financial Report 2010 Notes to the Consolidated Balance Sheet
14 – Financial Instruments carried at Fair Value
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 usually 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 the 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:
Level 1 – Instruments valued using quoted prices in active markets: These are instruments where the fair value
can be determined directly from prices which are quoted in active, liquid markets and where the instrument
observed in the market is representative of that being priced in the Group’s inventory.
These instruments include: high-liquidity treasuries and derivative, equity and cash products traded on highliquidity
exchanges.
Level 2 – Instruments valued with valuation techniques using observable market data: These are instruments
where the fair value can be determined by reference to similar instruments trading in active markets, or where
a technique is used to derive the valuation but where all inputs to that technique are observable.