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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How to Accelerate XVA Performance

In the post-crisis world, an increasing number of banks have set up a centralized XVA desk. With the introduction of new regulations to ensure banks are adequately capitalized, it has become common practice to include certain costs in the pricing of OTC derivatives that, in many cases, had previously been ignored.


A First View on the New CVA Risk Capital Charge

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IFRS13: The Implications for Hedge Accounting

This whitepaper explores the challenges, risk factors, calculation techniques, and concepts for measuring financial instruments under IFRS 13. It examines the effect of CVA and DVA on hedge effectiveness, the different approaches for testing hedge effectiveness and best practice for inclusion or exclusion of CVA and DVA in setting up hypothetical derivatives.

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