"We believe this change makes our earnings comparison more meaningful and easier to understand, therefore we adopted early," said Paul Donofrio, chief financial officer at BAML, during the bank's fourth-quarter earnings call in January.Įxcept, that is, for those banks that decided to hedge the DVA from their structured notes holdings with negatively correlated bonds or credit default swaps (CDSs) referencing peer institutions. They can continue marking the products to market and recognising profit on day one, but the fair value changes don’t cause undue earnings volatility The move by accounting standard setters to shift DVA out of P&L will probably be welcomed by many structured note issuers. In fact, some banks such as Credit Suisse and Bank of America Merrill Lynch (BAML) adopted the change early. They can continue marking the products to market and recognising profit on day one, but the fair value changes don't cause undue earnings volatility.
The move by accounting standard setters to shift DVA out of P&L will therefore probably be welcomed by many structured note issuers.
Even so, forcing the chief executive to explain away DVA gains or losses on quarterly earnings calls is unlikely to endear a structured note business to upper management. The industry viewed the DVA fluctuations of structured notes and other liabilities tied to banks' own credit as irrelevant to the underlying performance of the banks, and stripped them out of the final profit numbers.
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