7 Risk Mitigation Accounting

26 February 2026 Agenda Paper 7 OFFICIAL - PUBLIC

Executive Summary

Project Stage

Project Type

Influencing

Project Scope

Significant

Purpose of the paper

On 3 December 2025, the IASB published the Exposure Draft (ED) IASB/ED/2025/1 Risk Mitigation Accounting (Proposed amendments to IFRS 9 and IFRS 7), with the comment period ending on 31 July 2026.

The IASB is also conducting field tests of the proposals, with preliminary results due on 31 July 2026, and final results by 30 November 2026.

The purpose of this paper is to provide an overview of key aspects of the proposed amendments in the ED, including the Secretariat's preliminary observations. This will support an initial technical discussion by the Board to inform the contents of the UKEB Draft Comment Letter.

Summary of the Issue

Existing hedge accounting requirements in IFRS 9 Financial Instruments and IAS 39 Financial Instruments: Recognition and Measurement do not provide a solution for complex risk management situations where risks are managed dynamically.

The IASB has noted that entities continue to find it challenging to account for their dynamic risk management activities, as the current requirements are not designed for such situations, and the constraints make it difficult for entities to faithfully represent the economic effect of such risk management activities.

The ED aims to provide a comprehensive solution that more faithfully represents an entity's economic position for interest rate repricing risk management activities.

Decisions for the Board

1Do Board Members:

1. Have questions or comments on the key aspects of the proposed amendments presented in this paper?
2. Have any additional matters they believe should be considered for inclusion in the UKEB Draft Comment Letter?

2Do Board Members agree with the Secretariat's proposed approach to the Draft Comment Letter?

Recommendation

Not applicable.

Background: Risk Mitigation Accounting (Proposed amendments to IFRS 9 and IFRS 7)1

The implementation of IFRS 9 Financial Instruments aimed to introduce improved hedge accounting requirements. However, it did not provide a solution for complex risk management situations where risks are managed dynamically. In such cases entities were permitted to continue applying IAS 39 Financial Instruments: Recognition and Measurement².

The IASB has noted that entities find it challenging to account for their dynamic risk management activities. The current requirements are not designed for such situations, and the constraints make it difficult for entities to faithfully represent the economic effect of such risk management activities³.

In response, the IASB has published an ED that aims to provide a more faithful representation of the entity's economic position for such risk management activities. The scope of the ED is limited to interest rate repricing risk⁴, in instances where entities meet the criteria to demonstrate that this risk is being managed dynamically.

Consistent with the existing hedge accounting requirements of IFRS 9, the proposed requirements are voluntary. The IASB proposes to withdraw IAS 39 when the proposed amendments are available for use.

A summary of the proposed changes can be found in the IASB's snapshot document.

Preliminary analysis of the IASB's Exposure Draft

1At the January 2026 UKEB meeting, the Board requested an initial technical discussion on the key aspects of the ED ahead of its consideration of the Draft Comment Letter at the March 2026 Board meeting.

2The preliminary analysis presented below focuses on key aspects of the proposals, reflecting the results of the Secretariat's desk-based research and stakeholder outreach to date. This includes the UKEB Financial Instruments Working Group (FIWG) roundtable held on 15 January 2026⁵. FIWG members as well as other interested stakeholders from a range of backgrounds (such as risk management and treasury) including some Board Members, attended the roundtable and shared early feedback on the ED.

3Board Members' discussion and feedback at this meeting will inform the drafting of the Draft Comment Letter.

4The Secretariat's technical analysis work and discussions with stakeholders are ongoing and will continue during the Draft Comment Letter consultation period.

Key aspects of the proposals for discussion

5The following tables outline five key aspects of the ED:

1. Objective and scope.
2. Underlying portfolios.
3. Benchmark derivatives.
4. Risk mitigation adjustment excess.
5. Transition.

1.- Objective and scope

Exposure Draft

Objective

6The objective of risk mitigation accounting (RMA) is for financial statements to represent the economic effect of an entity's risk management activities, if the entity manages repricing risk⁶ on a net basis. Risk mitigation accounting also provides information about the purpose and effect of derivatives used to mitigate repricing risk. [ED7.1.3]

Scope

7To ensure that risk mitigation accounting provides useful information to users of financial statements, an entity is permitted to apply risk mitigation accounting if, and only if:

1. the entity's business activities give rise to the recognition and derecognition of financial instruments that expose it to repricing risk;
2. the entity's risk management strategy specifies risk limits within which repricing risk, based on a mitigated rate⁷, is to be mitigated; and
3. the entity mitigates repricing risk arising from underlying portfolios on a net basis using derivatives in accordance with its risk management strategy.

8For entities that apply risk mitigation accounting, a detailed set of quantitative and qualitative disclosures is required.

9Entities are not required to apply risk mitigation accounting. However, if an entity's risk management activities have all the characteristics specified above, and it chooses not to apply risk mitigation accounting, it must provide qualitative disclosures, including an explanation to enable users of its financial statements to understand how the entity manages its exposure to repricing risk.

Level of application

10An entity is required to apply risk mitigation accounting at the level at which the entity mitigates the repricing risk arising from underlying portfolios, in accordance with its risk management strategy.

11For example, an entity that manages repricing risk at the reporting entity level applies risk mitigation accounting on that basis. In contrast, an entity that manages repricing risk at a lower level within the reporting entity (e.g. based on different mitigated rates) applies risk mitigation accounting for each subset of underlying portfolios that the entity aggregates to manage repricing risk on a net basis.

Formal documentation

12An entity is required to formally document how it will apply the RMA requirements for each subset of underlying portfolios that is separately managed for repricing risk on a net basis.

13An entity is required to explain in its formal documentation how it:

1. manages repricing risk in accordance with its risk management strategy;
2. determines the repricing risk to be mitigated;
3. specifies the risk mitigation objective;
4. identifies the designated derivatives used to mitigate repricing risk; and
5. captures the effects of unexpected changes in the net repricing risk exposure.

Secretariat's preliminary observations

Objective

14The IASB's ED states that the objective for the proposals is to “represent the economic effect of an entity's risk management activities if the entity manages repricing risk on a net basis”. The Secretariat questions whether full alignment between accounting and risk management practices is achievable or even desirable, given that each practice could have different objectives. This is exacerbated because there is no consistent approach to managing repricing risk amongst different banks across different jurisdictions.

15The Secretariat observes that the proposed RMA model introduces requirements, for example, in relation to the items allowed in the underlying portfolios, that could lead to a misalignment between the accounting and the entity's risk management practices. Such departures might be necessary but further work is needed to understand the challenges that are likely to arise to

16operationalise the proposed model and whether the accounting outcome would still provide useful information for users of financial statements.

Scope

17The scope of the proposed amendments is entities that manage repricing risk on a net basis using derivatives. The proposed model was clearly developed with banks' risk management practices in mind. However, there are other entities, such as insurers and corporates with large treasury functions, who could fall within the scope of the proposed amendments. Further work needs to be undertaken to assess the likely extent of the scope and whether the proposed model would be suitable for non-banks⁹.

18Another issue is that the proposals would require entities that are in scope, but that decided not to apply RMA, to provide qualitative disclosures about their repricing risk management activities. This is a change from existing disclosure requirements on IFRS 7 Financial Instruments: Disclosures as similar disclosures are not currently required if hedge accounting is not applied. This highlights the importance of clearly defining the appropriate scope for the proposals.

19In addition, the proportionality of the proposed disclosures will need further assessment, including whether they would provide useful information to users of financial statements.

Level of application

20RMA must be applied at the level at which the entity applies its risk management strategy. For organisations with diversified portfolios, application would likely be at a level lower than the reporting entity. Further work is needed to understand the implication of the level at which RMA is applied on the proposed disclosures at a consolidated level, in particular in relation to the proposed quantitative disclosure requirements.

Formal documentation

21The proposals require an entity to formally document its risk management strategy, including, but not limited to, specific aspects such as, the mitigated rate, the mitigated time horizon and risk limits.

22However, the requirements of the proposed amendments could be inconsistent with an entity's risk management practices (e.g. exclusion of own equity from the underlying portfolios). Therefore, entities' formal documentation of their risk management strategy for accounting purposes, might not fully align to the entity's actual overall risk management strategy. This would potentially create complexity and additional operational burden for entities.

23The Secretariat plans to perform work to understand the extent of this issue. This will include an assessment of circumstances that may represent a change to an entity's risk management strategy in practice (such as a change in tenor¹⁰ or duration) and the frequency with which these are likely to occur.

2.- Underlying portfolios

Exposure Draft

24For the purposes of applying the proposed amendments, the repricing risk from underlying portfolios is aggregated.

25Only the following items are eligible to be included in the underlying portfolios:

1. Financial assets classified as subsequently measured at amortised cost or fair value through other comprehensive income (in accordance with paragraphs 4.1.2 or 4.1.2A of IFRS 9).
2. Financial liabilities classified as subsequently measured at amortised cost (in accordance with paragraph 4.2.1 of IFRS 9).
3. Future transactions that could result in the recognition or derecognition of financial instruments specified in (a) or (b) above, in accordance with paragraph 7.2.4 of the Exposure Draft.
4. Hedged exposures¹¹ that affect an entity's exposure to repricing risk.

26While most financial assets and liabilities above are eligible for inclusion as they are exposed to interest rate risk on an individual basis, there is a portion of such financial instruments that may give rise to repricing risk only on a portfolio basis. This portion is also eligible for inclusion in the underlying portfolios¹².

27An entity cannot mitigate the same repricing risk more than once and only financial instruments with a counterparty external to the reporting entity are eligible to be included in the underlying portfolios.

Secretariat's preliminary observations

Inclusion of financial assets subsequently measured at fair value through other comprehensive income (FVOCI assets)

28The inclusion of FVOCI assets in the underlying portfolios could result in a potential 'double count' of a portion of their changes in fair value within the entity's net assets. This relates to the amount recognised within the Risk Mitigation Adjustment (the 'effective' portion).

29Conceptually, this arises because the 'effective' portion is recognised as an asset or a liability under the proposed model instead of in equity under the hedge accounting requirements in Chapter 6 of IFRS 9. The results of fieldwork will help inform the extent of this accounting outcome and any potential wider implications.

Exclusion of own equity

30The Secretariat understands from desk-based research and stakeholder feedback that banks often view equity as a source of funding and therefore hedge their own equity instruments¹³ as part of their risk management strategy.

31While an entity's own equity instruments are proposed to be excluded under the proposals, the use of 'equity modelling' to determine the amount of risk exposure arising from the relevant underlying portfolios is allowed under the new model¹⁴.

32It remains to be seen whether the proposed amendments allow entities to reflect the economic effects of their risk management activities without the inclusion of own equity instruments within the new model.

Hedged exposures

33Conceptually, hedged exposures as proposed in Risk Mitigation Accounting are similar to the concept of allowing an aggregated exposure to be designated as a hedged item in Chapter 6 of IFRS 9¹⁵.

34However, unlike aggregated exposures, hedge exposures require hedge accounting to have been applied first.

35While the Secretariat understands that the IASB believes this requirement would minimise the risk of double-counting between different risk exposures¹⁶, we intend to explore UK stakeholders' views on the potential implications of the proposed requirement.

3.- Benchmark derivatives

Exposure Draft

36An entity's risk mitigation objective represents the extent to which an entity mitigates its net repricing risk exposure to ensure that the residual exposure to repricing risk is within the risk limits specified in the entity's risk management strategy. It is required to be evidenced by the designated derivatives an entity uses to mitigate repricing risk.

37An entity is required to replicate the timing and amount of repricing risk as specified in the risk mitigation objective through benchmark derivatives.

38An entity is also required to construct new benchmark derivatives to have an initial fair value of zero based on the mitigated rate. Benchmark derivatives cannot simply replicate all the terms of the designated derivatives. They can only include features that are present in both the designated derivatives and the repricing risk represented by the risk mitigation objective.

39Unexpected changes in financial instruments included in underlying portfolios could occur if these instruments reprice earlier or later than expected. Benchmark derivatives must be adjusted to capture the effects of unexpected changes in the financial instruments included in the underlying portfolios if the unexpected changes reduce the net repricing risk exposure below the risk mitigation objective in any repricing time band.

40As a practical expedient, if reasonable and supportable information to estimate the effect of unexpected changes on the benchmark derivatives is not available without undue cost or effort, an entity deems the unexpected changes to have occurred at the time when the risk mitigation objective was last specified.

Secretariat's preliminary observations

41Conceptually, benchmark derivatives as proposed in Risk Mitigation Accounting are similar to the 'hypothetical derivatives' currently used in cash flow hedge accounting (see IFRS 9 paragraphs B6.5.5-B6.5.6).

42Although the use of theoretical derivatives in hedge accounting is not new, a preliminary analysis suggests that additional clarity is needed in the proposed requirements for benchmark derivatives.

43The Secretariat plans to explore specific areas such as:

1. How the date of the benchmark derivative within a repricing time band (e.g. at the beginning, middle point or end, or other approach) should be determined.
2. Approaches to adjusting benchmark derivatives to capture the effects of unexpected changes, which may involve a degree of backdating for the purpose of determining the adjustments required to fully reflect those changes (assuming that reasonable and supportable information is available).
3. Whether partial de-designation of benchmark derivatives is allowed as a result of unexpected changes.
4. The construction of the benchmark derivatives when hedging with options (i.e. the requirement for benchmark derivatives to have an initial fair value of zero).

4.- Risk mitigation adjustment excess

Exposure Draft

44At each reporting date, an entity is required to assess whether there is an indication that the risk mitigation adjustment balance accumulated may not be realised in full over the mitigated time horizon¹⁷.

45If such an indication exists, the entity determines whether the risk mitigation adjustment balance exceeds the present value of the net repricing risk exposure as at the reporting date.

46If such an excess is identified, the entity is required to reduce the risk mitigation adjustment balance by the amount of excess identified and recognise it in profit or loss immediately. Such excess amounts are not allowed to be reversed in future periods.

47When excess amounts are recognised, the entity must make corresponding adjustments to the releases of the risk mitigation adjustment balance to profit or loss in future periods on a systematic and rational basis over the mitigated time horizon.

Secretariat's preliminary observations

48The proposed amendment in this area is intended to be a ‘reasonableness test’ which acts as a 'backstop' to ensure that the risk mitigation adjustment balance can be fully realised over the mitigated time horizon.

49The proposed amendments should ensure that significant amounts of risk mitigation adjustment, which cannot be realised over the mitigated time horizon, do not remain on the balance sheet. They should also balance the complexity and costs associated with assessing and recognising such excess amounts.

50Stakeholder feedback, including the results of fieldwork, on the following areas will be key to assessing whether the above balance can be achieved:

1. Whether the proposed amendments in relation to risk mitigation adjustment excess would work as intended for the different types of risk management strategies in practice.
2. How often an indication exists in practice that the risk mitigation adjustment balance may not be fully realised over the mitigated time horizon. For example, practically, how feasible it is to adjust the benchmark derivatives to fully reflect unexpected changes to the net repricing risk exposure.
3. How often an excess amount of risk mitigation adjustment is expected to be recognised in practice and consequently, the implications on the complexity and costs associated with tracking the adjustments required in future periods.

5.- Transition

Exposure Draft

51Entities in scope will be permitted to apply Risk Mitigation Accounting prospectively.

52In addition, the IASB proposes the withdrawal of IAS 39 Financial Instruments: Recognition and Measurement.

53The transition requirements an entity would be required to apply vary depending on whether the entity previously applied the hedge accounting requirements in IAS 39 or Chapter 6 in IFRS 9.

54The proposed amendments also permit entities, on transition, to revoke their previous designation of financial assets or financial liabilities as measured at fair value through profit or loss if those financial assets or financial liabilities will be included in underlying portfolios for purposes of applying risk mitigation accounting.

Secretariat's preliminary observations

55Risk mitigation accounting will be complex, especially when coupled with the potential simultaneous transition of other types of hedge accounting (i.e. on individual hedges in accordance with IAS 39 or IFRS 9). As a result, early stakeholder feedback has expressed the need for a longer timeline to implement the proposed amendments.

56Additional application guidance will be needed to address certain aspects of transition, such as dealing with off-market derivatives on transition to the proposed model.

57There are currently questions as to whether the withdrawal of IAS 39 will be feasible. Given the significant cost and complexity attached to the implementation of risk mitigation accounting, the IASB should ensure the proposals achieve the right balance in relation to the likely cost and benefits.

58The Secretariat understands from stakeholder feedback that the carve-out in the UK-endorsed version of IAS 39¹⁸ is applied by some smaller banks and building societies. The Secretariat therefore plans to engage with smaller entities to understand how they are likely to be impacted by the proposals.

Questions for the Board

1Do Board Members:

1. Have questions or comments on the key aspects of the proposed amendments presented in this paper?
2. Have any additional matters they believe should be considered for inclusion in the UKEB Draft Comment Letter?

Next Steps

59The Secretariat will continue its assessment and to engage with relevant stakeholders to gather their views on the IASB's proposals.

60As per the Project Initiation Plan, the Secretariat aims to present a Draft Comment Letter for the Board's consideration at the March 2026 Board meeting.

Proposed approach to the Draft Comment Letter

61Given the relatively complex nature of the proposed requirements and the long timeline for comments permitted by the IASB, stakeholders are only able to share their early assessments of the ED. As such, the Draft Comment Letter will be at a relatively high level, and focused on a limited number of key issues identified via desk-based research and limited stakeholder outreach. The accompanying Invitation to Comment will include specific questions about other aspects of the proposals to be assessed further with relevant stakeholders during the consultation period.

62This approach recognises that most stakeholders expect to undertake their own detailed assessment to more fully assess:

1. the level of complexity of the proposed amendments;
2. the operational effectiveness of the proposals via fieldwork; and
3. the implications for their own annual financial reporting and whether it leads to useful information for investors.

Question for the Board

2Do Board Members agree with the Secretariat's proposed approach to the Draft Comment Letter?

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Footnotes