Review of financial reporting – DNB ASA
Published: 13 May 2015
Last updated: 18 March 2019
Finanstilsynet (the Financial Supervisory Authority of Norway) has reviewed certain matters in the financial statements of DNB ASA ("DNB"). The review covered the bank's valuation of its portfolio of loans recognized at fair value, principally fixed rate loans, in the interim reports and annual report of 2013. At the end of 2013, loans at fair value amounted to circa NOK 123 billion, which again amounted to circa 9 percent of the total loans. In Finanstilsynet's view the bank has in periods assigned too high a value to the loans.
In its financial statements DNB has valued the loans at fair value by discounting remaining future cash flows. In its valuation model DNB has applied a discount rate below the bank's own and the market's lending rate. In periods the difference between the discount rate and the market's lending rate has been up to 100 basis points. At initial recognition the loans have been assigned a value higher than the transaction price, which is based on the agreed lending rate, and a day-1 profit has frequently appeared. DNB has considered the day-1 profit to be immaterial.
Fair value is defined as the price that would be received to sell an asset in an orderly transaction. In Norway there is no secondary market for selling or buying fixed rate loans, but potential buyers would be the same participants as those offering fixed rate loans today. Thus, observable prices in the retail market (the market for issuing new fixed rate loans) are relevant data in a valuation model. In Finanstilsynet's view DNB has to take into account this information in future periods and apply a discount rate which does not differ significantly from the market's lending rate. Furthermore, the bank has to disclose more information on its valuation of fixed rate loans and on its accounting policy for day-1 gains and losses.
DNB has informed Finanstilsynet that the bank will for future periods ensure that the discount rate used to determine the fair value of the loans does not differ significantly from the market's lending rate. The bank has further confirmed that the disclosures regarding fair value measurement and the accounting policy for day-1 gains and losses will be improved in future reporting.