Under the current IFRS9, hedging may be carried out for certain portfolios of assets. However, it is not possible at a net enterprise level.
The new approach is optional – and will be incorporated as an option under IFRS9. And IAS39 will be withdrawn.
The potential benefits of this include: smoother reporting of profit and losses (for effective/ “perfect” hedges) and reduced/efficient use of regulatory capital.
However, there is also a risk of unforeseen consequences. This is a highly technical area and preparers, auditors and users of accounts are still digesting the implications. However, these might include: increased volatility of results, where hedges are ineffective in practice and restrictions in the way that banks currently hedge account, including the withdrawal of approaches allowed under IAS39.
What is hedging?
This is often achieved by purchasing derivatives related to the asset/ risk that you are seeking to protect against. These include: futures/ forward contracts for interest rates, foreign exchanges rates and commodities; interest rate swaps; and options.
Following the principles of risk and reward, downside risks may be reduced. However, the opportunity to outperform with higher profits may be lost too.
There is also a cost to buying a derivative – inherent to the risk being covered – and built into the contract.
The benefit for companies (who are not buying derivates for investment) is in reducing the risk to their operations. While they forego the opportunity to earn exceptional returns (if the risk turns out in their favour), they ensure that the business can continue its core activities – and derive profit from its everyday operations – by avoiding the downside risk. For example, by reducing cash flow risk – they can avoid financial stress to a company’s funding, through downside risks.
Similarly, investors in a company will generally value stability in earnings, rather than volatility. And hedging and its related accounting, is a way of achieving this.
In the case of banks, there is an additional reason to hedge. And this is prudential concerns. Banks rely on confidence to carry on their business successfully. If confidence is lost, there is a risk of a “run on the bank” – which can very quickly force a bank to close.
Therefore, banks particularly want to protect against risks – and hedging is one example. Indeed, prudential regulators require banks to hold a specific amount of regulatory capital – as a “buffer” against downside risks. And this, in itself, provides a form of hedging protection.
What is interest rate hedging (repricing risk)?
Interest rates are set by central banks and reflect economic conditions. The future path of interest rates is uncertain – and may move in response to many outside factors.
This presents a risk for banks – who both pay out interest on their borrowings (for example deposits from current account and savings holders) – and earn interest on their loans made to customers (for example mortgages and corporate loans).
In theory, for an individual item, a bank might reduce or completely eliminate interest rate risk (and therefore, volatility in its earnings). For example, by purchasing a 3-month forward interest rate contract – and match this against a 3-month loan to a company.
What assets and liabilities are affected by interest rate movements?
Banks earn a return, by lending money out to personal and corporate customers and receiving interest in return. These loans can be over a range of time periods (maturities) and at a mix of variable and fixed interest rates. These give rise to debtors (assets) on the balance sheet. Examples include: mortgages, car finance and fixed income bonds.
Conversely, banks fund their lending by receiving money from creditors (liabilities). These may also be over a range of maturities and incur interest payments at a mix of fixed and variable rates. Examples include: current accounts, instant access accounts, short-term savings and long-term savings accounts.
Banks will have a hedging strategy that manages the risk arising from their net position (assets less liabilities). Given the nature of their business, there is already a degree of natural hedging between assets and liabilities, since assets and liabilities with similar interest rate terms and contractual and or behavioural maturities, will cancel each other out to a degree, in getting to a net position.
Banks will need to model the expected future movements in their portfolio holding of assets and liabilities (in order to determine their expected net position that will need hedging). This depends on products that have different maturities, interest rates, and fixed or variable natures. And they will need to make assumptions about their future volumes of each product held – which in turn depend upon uncertain factors, such as: customer behaviour, health of the economy, unemployment rates, the path of central bank interest rates and geopolitical factors.
The key point being that banks have to make assumptions. In theory, it may be possible to achieve a perfect hedge, based on expected future holdings. However, in practice, the reality will differ from assumptions – leading to a different outturn. A degree of ineffective hedging. And a resultant increase or decrease in profits for the bank.
How do banks currently account for hedging?
Currently, banks may account for hedging under IFRS9. The standard does not mandate hedge accounting – however, it is an option that may be advantageous for banks.
Without hedge accounting, there is a risk of mismatches. The derivatives used for hedging may need to be “marked to market”, at fair value. Whereas the liability, which gave rise to the underlying risk that is being hedged, may continue to be accounted for at cost.
IFRS9 provides for hedging in three cases: fair value hedges, cash flow hedges, and hedges of a net investment in a foreign operation. Hedges must be specifically identified in advance. Only certain designated items may be used – for both the hedging instrument and the asset/ liability being covered. And specific disclosures are required.
Prior to IFRS9, hedge accounting was possible under IAS39. Again, it was an option, but not mandatory. The rules under IAS39 were strict – and as a result, the standard was considered difficult to apply. IFRS 9 allowed the following extra flexibility: (i) a wider choice of hedging instrument, (ii) more types of items to be hedged, (iii) more flexibility in the hedge effectiveness test and (iv) rebalancing – which allows you to adjust the hedge, when things change.
However, a possible advantage of IAS39 was that hedge accounting might be discontinued at any time. Whereas, under IFRS9, the conditions for discontinuation are more restrictive.
Some banks opted to continue hedge accounting under IAS39 (however, once you move to IFRS9, you cannot go back).
In addition, the EU introduced various changes to IAS39 (the “carve-out”) when adopting IFRS more broadly in 2005. These included reversing the disallowance of Fair Value hedge accounting, for portfolio (macro) hedges (now called RMA) of core deposits, under IAS39.
Banks choosing to continue IAS39 (with the EU carve-out) had the freedom to account for macro-hedging, while waiting for RMA to be developed. However, with the introduction of RMA, the IASB proposes to withdraw IAS39. Therefore, these banks will need to test whether the new proposals allow them sufficient flexibility to continue their macro-hedging operations – and raise any issues in the responses to the consultation.
Historical development of Risk Mitigation Accounting (RMA)
Risk mitigation accounting has been discussed and under development by the IASB, for around the last 10 years. It was previously known as Dynamic Risk Management (DRM) or macro hedge accounting.
It is a highly technical and complex area – requiring an understanding of both hedging/ treasury activities and accounting.
Obviously, great care is needed – as it is integral to the functioning and business models of banks. And confidence is key to the continued stability of banks. Therefore, caution is required when making changes to the way that banks account. And the implications must be foreseen and understood. Objectives of RMA:
The objective of RMA is to more closely reflect the economic reality of banks’ hedging activities, through the reporting of their performance.
RMA should :
- Better reflect how banks manage repricing risk, where their business is dynamic
- Provide transparency about the bank’s risk management of repricing risk
- Ensure greater consistency between the deposit/loan and the derivative chosen to hedge
- Represent the extent to which repricing risk has been mitigated by the bank.
What are the BENEFITS of RMA (net position)?
The intended benefits include:
- Smoothing of profit and loss (P&L) results
- Reflecting the commercial reality of how banks hedge and manage their businesses
- Reducing the capital requirements of banks (since allowing banks the flexibility to hedge their net position will be more capital efficient)
- Reduction in the operating costs of hedging. Because rather than having to hedge against different groups of assets, banks only need to hedge their net position – which may be more efficient and therefore more cost effective.
What are the DISADVANTAGES/ potential risks of RMA?
The possible disadvantages of RMA include:
- Ineffective hedges might potentially lead to greater volatility in the profit and loss account (contrary to the intentions). This is because it may be argued that with only one net position (for the whole entity) being hedged, any departures from assumptions may lead to large swings (given the size of the entity’s overall position). Whereas, under IFRS9, several portfolios are individually hedged. So that the magnitude of departures on each portfolio may be less. And there may also be some degree of compensation, between the effects on each portfolio, if some move in opposite directions from each other.
IASB Exposure Draft (consultation) on RMA
On 3rd. December 2025, the IFRS Foundation (IASB) published an exposure draft, consulting on the RMA proposals .
The consultation is open for a longer period than usual: 240 days, closing on 31st. July 2026. The IASB has allowed this extra time – to allow individual banks to carry out extensive field testing – and to feedback their conclusions. Business models and hedging practices vary between banks – and this gives an individual bank the opportunity to identify if there might be unintended consequences, that could pose problems for their particular business practices.
Scope of the RMA proposals: is it just big banks? Are insurers included? What about other companies/ industries that use hedging?
The proposals are written generically – to cover any company that uses hedging, rather than banks specifically. This may simply reflect an approach of keeping drafting non-specific, in general, for accounting standards. Nevertheless, the requirements of big banks, who engage in hedging on a net balance sheet basis, have clearly been the main driving force in developing this new approach.
So, the wording does not specify banks or large banks as being the scope.
Insurers and other companies that use hedging (for example, oil companies who trade oil futures and use derivatives) may want to consider the implications of RMA too.
The IASB asks a specific consultation question about insurers: Question 11 . They ask whether the RMA proposals would better reflect the economic reality of insurers’ management of repricing risk, than the existing accounting standards. (As well as asking for background information about: (a) insurers’ risk management activities and (b) insurers’ business models.)
For other industries, the IASB, in its next steps, hints that as part of its future program, it may look at whether accounting treatment should be developed to help these industries deal with RMA. (See paragraph IN19 (c ), page 7 of the ED text).
Insurance
The activities of insurance companies are different from banks. In particular, insurers tend to hedge against their regulatory (prudential) capital requirements, under Solvency II.
Insurers may therefore consider responding to Question 11, to ensure that their perspective is understood – and to make helpful suggestions as to a suitable way forward.
ICAEW activities around RMA
The ICAEW has established a working group to consider the implications of RMA and to draft a response to the Exposure Draft. This is a small and active group, comprising audit firms, banks and insurers.
We will consider whether to publish further content, during the 8-month consultation period. And whether to hold wider roundtables/ workshops.
We anticipate that large banks will submit their own individual responses to the IASB. Together with carrying out extensive field-testing and sharing findings. And that audit firms will submit responses too. Therefore, the focus of the ICAEW work will be more on common issues and cross-cutting points.
Next steps:
- Consider submitting an individual response to the IASB’s exposure draft, on behalf of your business. These are due on 31st July.
- Provide input to the response being prepared by the ICAEW’s working group: either by contacting Andrew Boardman (andrew.boardman@icaew.com) or another member of the group.
- Insurers: consider responding to Question 11 of the consultation
- Other industries: consider responding to the consultation, in order to inform the future development work of the IASB relating more widely, to the needs of other industries.
- Future content from the ICAEW: we may publish articles and arrange workshops, as the need arises, over the remaining 6 months of the consultation.
