Determining and reporting the fair value of derivative instruments remains one of the most important issues financial institutions are currently facing.
This importance has been amplified in 2013, particularly with respect to the incorporation of counterparty risk, due to IFRS 13 (“Fair Value Measurement”).
One of the key aspects of reporting under IFRS 13 is the Credit Value Adjustment (“CVA”) and Debt Value Adjustment (“DVA”) relating to the counterparty risk of Over-The-Counter (“OTC”) derivative contracts.
While evolving accounting standards have attempted to provide clarity with respect to fair value reporting requirements, these standards are still generally not sufficiently prescriptive to completely remove ambiguity and uncertainty. Financial institutions are thus typically interpreting the standards in terms of compliance with requirements, with reference to generally accepted current best market practice.
CVA and DVA calculations are complex in nature and therefore their treatment under IFRS 13 will be anything but straightforward.