Deutsche Bank has recorded a profit instead of a loss in its most recent results by using new accounting provisions designed to mitigate the impact of the financial crisis on European banks.
The rules ease fair value accounting, where companies mark financial instruments at their current market price. The credit crisis has caused markets to plunge, forcing banks and insurers into writing down hundreds of billions of dollars in the value of their holdings, crushing profits and undermining their capital reserves.
Under fair value accounting, assets must be classified into one of three categories. The first is "held for trading" where securities are reported at fair value and any change in prices directly affect profits. Next is "available for sale" where holdings are reported at fair value, but any changes in the value remain on the balance sheet.
The third, rare, category is "held to maturity" where assets are reported at amortised cost, where the profits from holding the instrument are steadily and predictably recognised over its lifetime. Since this does not take account of market moves, it produces smoother, more certain results. Loans not intended for sale also get the same treatment.
Other European banks may follow Deutsche's lead when they report results in coming days.
http://www.ft.com/cms/s/0/d7d9bc42-a6ec-11dd-95be-000077b07658.html
http://www.ft.com/cms/s/0/601253f4-a6ec-11dd-95be-000077b07658.html
RBS wrote down 5.9 billion pounds on structured product assets in the first half, while analysts had forecast it could write off billions more.
The bank said accounting changes on how securities are classified had increased operating profit by a net 1.2 billion pounds.
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