The rules apply the prudent valuation standard to positions in the trading book and to positions measured at fair value elsewhere. For an asset the prudent value is at or below fair value, for a liability at or above it, and the additional valuation adjustment (AVA) is the absolute value of the difference. An AVA is never negative.
Consider a hypothetical example in which an asset with a fair value of 10 billion yen has an uncertain price and a prudent value of 9.8 billion yen. The AVA is 200 million yen, and this amount is allowed for as a capital adjustment. If the accounting valuation is already 9.8 billion yen, an adjustment for the same uncertainty has already been made, so the AVA for that uncertainty is zero.
An AVA is determined only to adjust Common Equity Tier 1 capital, and the recitals of the regulation say it does not affect the amount of own funds requirements. This does not hold where the derogation for small trading book business under Article 94 of the Capital Requirements Regulation (CRR) applies. The regulation sets out how valuation uncertainty is divided (market price uncertainty, close-out costs, model risk and others) and how data is used. When market data is used, the same range of data as in independent price verification is considered.