Accounting for KVA under IFRS 13
Risk, March 2016 (shortened version)
15 Pages Posted: 20 Jun 2015 Last revised: 29 Feb 2016
Date Written: February 27, 2016
Abstract
We explore the accounting view on KVA for derivatives, where KVA is defined as the lifetime cost of capital, i.e. the Capital Valuation Adjustment. Accounting uses ‘fair value’ in most circumstances. IFRS 13 (Fair Value Measurement) defines fair value and it explicitly replaces previous requirements in individual standards. This fair value is based on financial management and management accounting models and concepts. These concepts are embodied in economic decision making models that use discounting, relevant cash flows, and any incremental changes consequent upon the project or investment. These economic decision making models naturally include the cost of allocating scarce capital that cannot then be used elsewhere. In short, IFRS 13 specifically requires preparers of accounts to use economic models. In this case the project or investment is the derivative, and regulations (e.g. Basel III) set minimum capital requirements. Thus by IFRS 13 accounts should reflect the costs of allocated capital, i.e. KVA.
Keywords: KVA, Accounting, Basel III, IFRS 13
JEL Classification: M41, L51, K20, G21, G12
Suggested Citation: Suggested Citation