IFRS13 – Accounting for CVA and DVA
IFRS 13 "fair value measurement" became effective 1st of January 2013. The International Accounting Standard Board (IASB) issued IFRS (International Financial Reporting Standards) 13 in May 2011 to improve the consistency of fair value measurements.

With the introduction of IFRS 13, the requirement to calculate complex variables, such as CVA and DVA remains. . The introduction of IFRS13 will have significant implications for all firms, including corporates and those in the financial services sector that measure financial assets at fair value.

According to the IFRS 13, model-based fair value measurements have to take into account all risk factors that market participants would consider, including credit risk i.e. the counterparty risk for OTC financial products. In order to reflect the credit risk of the counterpart in an OTC derivatives transaction, an adjustment of its valuation has to be made. Therefore, not only does the market value of the counterparty’s credit risk (CVA) need to be taken into account, but also the company’s own Counterparty Credit Risk (debt valuation adjustment – DVA) has to be considered in order to calculate the correct fair value.

For consistent, accurate calculation of CVA and DVA, including sensitivities, the ideal method for simulation of risk is the full-revaluation Monte Carlo model. The underlying simulation engine needs to be extremely efficient, powerful enough to support even the largest, most complex portfolios and allow for pre-trade profitability analysis. Risk factors, for example volatilities, become very important for XVA evaluation, even if they are not part of trade valuation.

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