Credit Value Adjustment or CVA has been around for a long time. However, the introduction of the accounting standard IFRS13 in 2013, drove a requirement to understand it a bit better. The new standard required the CVA component to be separately reported from the fair value of a financial instrument.
So – what is Credit Value Adjustment?
CVA is the difference between the risk-free portfolio value and the true portfolio value that takes into account the possibility of a counterparty’s default. In other words, CVA is the market value of counterparty credit risk.
In 2013 the big question was whether or not it would be material enough for most organizations to worry about; given the potential complexity around its calculation, most hoped not.
There is no doubt if you have cross-currency interest rate swaps, the impact of CVA is likely to be material and most companies that use these types of instruments would be expected to have a treasury management solution.
However, many other organisations are still relying on spreadsheets to capture and record their treasury transactions and lack the ability to calculate financial instrument valuations – let alone the more complex CVA. Hedgebook fills this space for mid-sized organisations that do not require, or justify the expense, of a full-blown treasury management system. Hedgebook values financial instruments – such as interest rate swaps – and provides CVA adjusted valuations at the push of a button.
Do you need to worry about CVA is still the question?
Many still do not know there is a requirement, let alone how it will be calculated
Whether it is material or not remains the question. But even if it is not material, there may be a requirement to prove this. At the end of the day, the audit profession decides whether organisations will need to calculate CVA – or not. We still keep a watchful eye on both the banks’ ability to provide the CVA component and the audit firms requirement for organisations to calculate it.
If you are interested in learning more about CVA and IFRS 13 – check out this related blog which explains IFRS 13 as it relates to the Credit Value Adjustment (CVA) of a financial instrument.
If you would like to take a closer look at how Hedgebook might help you better manage this – and other valuations and reporting – please reach out for a quick online demo.