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Main Policy Differences between U.S. GAAP and IFRS

The main differences between the Group’s U.S. GAAP accounting policies and IFRS accounting policies are summarized below by accounting topic.

U.S. GAAP

IFRS

CONSOLIDATION (A)

Three models are used to assess consolidation status: voting rights, variable interest entities (‘VIEs’) and Qualifying Special Purpose Entities (‘QSPEs’).

Voting rights: Ownership of a majority voting interest (of over 50 %), directly or indirectly, of voting shares leads to consolidation, unless control does not rest with the majority owners.

VIEs: VIEs are consolidated by the interest holder that is exposed to the majority of the entity’s expected losses or residual returns, that is, the primary beneficiary.

QSPE: A special purpose entity (‘SPE’) that qualifies as a QSPE is not consolidated.

For operating companies, ownership of the majority of voting rights, either directly or indirectly, leads to consolidation. Potential voting rights are considered.

A SPE is consolidated by the Group where it is deemed to control it. Indicators of control include the SPE conducting activities on behalf of the Group and/or the Group holding the majority of the risks and rewards of the SPE.

There is no concept of a QSPE under IFRS.

LOAN ORIGINATION COSTS (B)

All cost of the loan origination activities, for example, the costs of evaluating a prospective borrower's financial condition, which are deemed directly attributable to loan origination, using a per unit cost calculation, are deferred regardless of whether they are incremental or not.

Only those costs associated with loan origination activities which are directly attributable and incremental to the origination of a loan are deferred together with the related fees and thus, included in the calculation of the effective yield.

FAIR VALUE OPTION (C)

At the time of the transition to IFRS, the fair value option available in U.S. GAAP was not adopted by the Group.

Financial assets and financial liabilities may be designated as at fair value through profit or loss (the fair value option) on initial recognition /on transition to IFRS where;

— a measurement or recognition inconsistency (accounting mismatch) is significantly reduced that would otherwise arise from measuring financial assets or liabilities or recognizing the gains and losses on them on different bases;

— they are managed and their performance is evaluated on a fair value basis with a documented risk management or investment strategy and reported to key management personnel on that basis; or

— they contain one or more embedded derivatives that significantly modify the cash flows resulting from those financial instruments.

Transaction costs in relation to financial assets and financial liabilities designated as at fair value through profit or loss are recognized in the income statement at inception.

The decision to classify financial assets or financial liabilities under the fair value option is irrevocable.

EQUITY METHOD INVESTMENTS (D)

There is specific accounting guidance on limited partnerships and entities of similar nature. A 3-20 % or more interest is required to be accounted for under the equity method of accounting as it is deemed to represent an ‘other than minor influence’.

There is no specific guidance on accounting for limited partnerships and similar entities; significant influence is usually demonstrated by a holding of 20-50 % of voting rights including the consideration of potential voting rights.

DEFINITION OF A DERIVATIVE (E)

Derivative contracts must have a notional and a mechanism to settle net or alternatively the derivative or the underlying asset is readily convertible to cash.

Derivative contracts are not required to have a mechanism to settle net to be classified as derivatives under IFRS.

LOANS HELD FOR SALE RECLASSIFIED TO TRADING (F)

Loans held for sale are held at lower of cost or market value. Loan origination fees and costs are recognized upon disposal of the loan.

Temporary impairment on loans held for sale under U.S. GAAP is taken through the income statement.

There is no ‘loans held for sale’ classification. Loans with the intention to sell in the near term are classified as trading.

FINANCIAL ASSETS CLASSIFIED AS AVAILABLE FOR SALE (G)

EQUITY INVESTMENTS

 

Equity securities that do not have a readily determinable fair value and other non-securitized equity interests are classified as other investments and carried at cost, less any other than temporary impairment.

Non-marketable equity investments and other non-securitized equity interests are classified as financial assets available for sale and are accounted for at fair value unless it can not be reliably determined.

AVAILABLE-FOR-SALE SECURITIES – TREATMENT OF FOREIGN EXCHANGE

 

Changes in the fair value of available for sale debt securities arising from changes in foreign exchange rates are recorded in accumulated other comprehensive income and transferred to income on disposal of the security.

Changes in the fair value of debt instruments classified as available for sale due to changes in foreign exchange rates are reflected in the income statement.

IMPAIRMENT OF ASSETS AVAILABLE FOR SALE

 

Impairments on available for sale debt securities cannot be subsequently reversed if they are no longer considered to be impaired.

Impairments on debt instruments classified as available for sale should be reversed if, in a subsequent period, the fair value increases and the increase can be objectively related to an event occurring after the impairment loss was recognized in the income statement.

INVESTMENT WITH A SALE RESTRICTION

 

In general, investments with a sale restriction of more than one year are classified as other investments and carried at cost, less any other than temporary impairment.

When an investment with a sale restriction is held by an entity that is regulated in the U.S. as a broker-dealer then it is carried at fair value with changes through the income statement.

Investments with a restriction on sale are classified as financial assets available for sale with changes through equity.

FINANCIAL ASSET DERECOGNITION (H)

Derecognition of financial assets is primarily based on control.

The relationship between true sale analysis and consolidation generally is that derecognition is considered first and then consolidation.

Special rules apply to accounting for repurchase and reverse repurchase agreements – a collateralization close to 100 % is required to preserve financing accounting.

Derecognition is based on risks and rewards. Control is only considered when substantially all risks and rewards have been neither transferred nor retained.

The consolidated group has to be determined prior to applying the derecognition criteria.

A partial derecognition of transferred financial assets may occur where the Group has a continuing involvement in them.

REAL ESTATE & LEASING (I)

GAINS ON SALE AND LEASE BACK

 

Gains arising from a sale and operating leaseback transaction are deferred and amortized over the period of the operating lease.

Gains arising from a sale and operating leaseback transaction are recognized immediately in profit or loss provided that the transaction has been entered into at fair value.

CONTINUING INVOLVEMENT IN SALE AND LEASEBACKS

 

Any form of continuing involvement precludes sales accounting.

If continuing involvement exists, this needs to be considered when determining the classification of the lease arrangement.

IMPAIRMENT OF INVESTMENT PROPERTIES

 

The assessment as to whether an investment property is impaired is calculated by assessing the undiscounted expected future cash flows arising from the property.

The assessment of impairment is performed on a net present value basis, applying a discounting factor to the expected future cash flows.

SHARE-BASED COMPENSATION (J)

SHARE AWARDS – ‘EARLY RETIREMENT’

 

Where plan rules allow staff of a certain age and/or service period to retain their awards on leaving, the expense is fully accelerated at the date the employee becomes eligible for early retirement. Early retirement rules are applied prospectively for awards granted after January 1, 2006.

Early retirement rules (accelerated amortization) are applied to all awards granted after November 7, 2002.

SHARE AWARDS – FORFEITURES

 

Amortization of the total number of shares expected to vest over the service period (net of expected forfeitures) is required. Forfeitures are no longer accounted for on an actual basis from January 1, 2006.

The rules relating to expected forfeitures apply to all share awards granted after November 7, 2002.

PENSIONS (K)

PENSIONS – ACCUMULATED ACTUARIAL GAINS AND LOSSES

 

From December 31, 2006, any unrecognized gains/losses at year end are reported as part of accumulated other comprehensive income (‘OCI’).

The Group uses the corridor method whereby actuarial gains and losses exceeding 10 % of the greater of plan assets and plan liabilities are recognized in profit or loss in equal amounts over the remaining service lives of current employees.

On transition the Group recognized all cumulative actuarial gains and losses in shareholders’ equity in accordance with the transitional provisions of IFRS 1.
Since transition, the corridor approach is used for actuarial gains and losses.

PENSIONS – LONG-TERM EMPLOYEE BENEFITS

 

No specific valuation rules apply.

Long-Term Employee Benefits are required to be valued using actuarial methods.

DERIVATIVES ON DEUTSCHE BANK SHARES (L)

Put and call options indexed to Deutsche Bank shares which are physically settled are classified as derivatives.

Put and call options indexed to Deutsche Bank shares which are physically settled are classified as equity instruments. For the physically settled written put options on Deutsche Bank shares the present value of the redemption amount is recorded as a liability. The liability is accreted over the life of the options to the redemption amount recognizing interest expense in accordance with the effective interest rate method.

TAX (O)

DEFERRED TAX ON SHARE-BASED COMPENSATION

 

If a jurisdiction allows a tax deduction for expenses relating to share-based compensation the permissible amount for the tax deduction might differ from the cumulative remuneration expense recognized in the income statement and/or the deduction might be allowed in a later period (e.g. with delivery of the shares).

 

The difference between the tax deductible amount of compensation expense and the cumulative compensation expense recognized for financial reporting (tax benefit/shortfall) has to be recognized only at delivery of the shares to the employees. Benefits are recorded in additional paid-in capital (‘APIC’), and shortfalls are recognized through the income statement.

Any credit to APIC is conditional upon the tax-paying position of the respective entity/tax group.



Shortfalls can be offset against excess tax benefits recognized in the same accounting period and in prior accounting periods.

In addition to the recognition of excess tax benefits/shortfalls in taxes when shares are delivered the difference between the expected future tax deduction for share awards outstanding and the cumulative compensation expense recognized for financial reporting (tax benefit/shortfall) has to be (i) estimated based on the current share price and (ii) recognized at any reporting date.

As IFRS allows for recognition of the expected future tax deduction a credit to APIC would be disallowed only if it is expected that the entity will not be in the position to make use of the excess tax deduction.

Possibilities to offset shortfalls against excess tax benefits are limited.

DEFERRED TAXES AND TAX REVERSAL ON AVAILABLE FOR SALE SECURITIES

 

The impact of changes in tax rate/tax law are included in net income even if the original deferred taxes have been recognized in equity.

Tax rate/tax law changes are accounted for consistently with the accounting for the transaction itself. Therefore, if the underlying temporary difference and related deferred taxes have been recorded in equity, a change due to tax law/tax rates is recorded in equity as well.