Measuring the net position

Learning objectives

• Prepare the measurement of a net position and the allocation of portfolio-level adjustments to the individual items.L4

Normative references

• IFRS 13 §50The exception in para. 48 does not concern presentation; when the basis of presentation differs from the basis of measurement, the entity may need to allocate the portfolio-level adjustments to the assets and liabilities of the group, on a reasonable and consistent basis that is appropriate in the circumstances.
• IFRS 13 §53For exposures to market risks, the net position is measured at the price within the bid-ask spread that is most representative of fair value in the circumstances, applied to the net exposure (cross-reference to paras. 70 and 71).
• IFRS 13 §54The market risks offset within the group must be substantially the same (no offsetting of interest rate risk against commodity price risk); any basis risk resulting from parameters that are not identical is taken into account in the measurement.
• IFRS 13 §55The duration of the exposure to a particular market risk must also be substantially the same; the part of the exposure that does not offset over the duration is measured on a gross basis.
• IFRS 13 §56For a group entered into with a particular counterparty, the measurement includes the net exposure to credit risk (of the counterparty or of the entity) when market participants would take into account arrangements that mitigate it in the event of default (master netting agreement, exchange of collateral), reflecting their expectations about the legal enforceability of those arrangements.

Original summaries of the paragraphs (reference register), never a quotation of the standard.

4 questions

• Tiremane bank's group meets the conditions of the portfolio exception. Its long positions are worth {long_positions} and its short positions {short_positions} (at market price), exposed to substantially the same market risks. Applying to the net position the price within the bid-ask spread that is most representative of fair value gives an adjustment of {adjustment} (to be deducted, case data). Compute the net position and then its fair value.L4
• Sauvelane bank must allocate a portfolio adjustment of {adjustment} (decrease in value) to the three items of the group, with gross amounts of {item_a}, {item_b} and {item_c}. Case convention: allocation in proportion to each item's gross amount, the basis being used consistently. Compute the share of the adjustment allocated to each item.L4
• For long and short positions to be offset in the net position for market risk, what is required?L4
• Cantelane bank entered into two derivatives with the same counterparty, covered by a netting and collateral agreement that limits the exposure to that counterparty's credit risk (case data). How does it assess that credit risk in the measurement of the net position?L4