Accounting for CVA / DVA

[fickou]

Hi everyone,

I would like to know if you have got your hands on some type of guidance on how to register the accounting effect of CVA and DVA. As required by IFRS 13, when estimating the fair value of a derivative instrument, one must account for the counterparty credit risk (CVA) and the own entity credit risk (DVA). In fact, as a derivative can have a negative and a positive future exposure during its lifetime, one must take into account the bilateral CVA (or BCVA). You end up with an adjustment that looks like this:
FV risk adjusted = FV risk free - BCVA = FV risk free - (CVA + (-DVA)) = risk free - CVA + DVA.

But when applying this concept, one can end up with some counterintuitive results, for example,

Risk free derivative fair value = $100
CVA = $4
DVA = $-6 (DVA always negative as it is the result of the derivative future negative exposures)
FV Risk adjusted = 100 - (4 + (-6) ) = 100 - 4 + 6 = $102.

The former result (i.e. $102 for a FV risk adjusted) is theoretically correct, but how to account for this gain due to an entity own credit risk ?

Any advice would be appreciated. Thanks !

[DJP]

Hello,

The entire fair value change must be recognised in P&L (including the effect of CVA/DVA).

[hubertd]

CVA and DVA is only calculated for non-cleared derivatives (bilateral). Search for EY CVA DVA pdf on the internet. This is the most accurate reference.