IFRS13 – Fair Value Measurement: the time is now!

IFRS13 – Fair Value Measurement: the time is now!

The year-end closing is approaching and with for many of companies a first application of IFRS13. Are you ready to comply with the new requirements? If not, it is still not too late to take action!

IFRS13 is applicable for reporting periods beginning on or after 1 January 2013 but, for most companies, 31 December 2013 will be the first date on which they have to be compliant with this standard. So what’s new?

Main change
The main change is the incorporation of Credit Value Adjustment and Debit Value Adjustment into the market value of all financial instruments that require fair value measurement. CVA is an adjustment that captures the credit risk of the counterparties. It represents the potential loss in case of default of your counterparty. The DVA is a little bit less intuitive; it is an adjustment that captures the credit risk of your own company. It represents the potential gain in case of default of the company. The CVA will reduce the asset position (loss) of a financial instrument and the DVA will reduce the liability position (gain) of a financial instrument.

Do you know how to perform these calculations?

  • Different methodologies are observable on the market with different levels of complexity but all of them involve the use of additional market data in order to represent the probability of default. Do you know which methodology to apply and if your treasury management system can compute these adjustments?
  • Do you know which market data to use? Is this data available on the market?
  • If your financial instruments are part of a hedge relation, do you know how the CVA-DVA adjustments will influence the effectiveness tests?

Don’t hesitate to contact us if you need help or advice on one of the questions. The Valuation Desk within Zanders has developed a methodology compliant with the requirements of the accountants, in terms of data and calculation. Since the beginning of this year, we have been regularly performing the calculation of the CVA/DVA adjustments for several companies.

Reference to the previous article for more explanations: IFRS-13 – Fair value measurement: Fair value is not enough!