6 Risk Mitigation Accounting

26 March 2026 Agenda Paper 6

Executive Summary

Project Stage

Project Type

Influencing

Project Scope

Significant

Purpose of the paper

The purpose of this paper is:

• to obtain the Board's approval for publication of the Draft Comment Letter (DCL) and the accompanying Invitation to Comment (ITC) on the IASB's Exposure Draft (ED) IASB/ED/2025/1 Risk Mitigation Accounting—Proposed amendments to IFRS 9 and IFRS 7; and
• to seek Board Member views ahead of the Risk Mitigation Accounting (RMA) session at the March 2026 IASB's Accounting Standards Advisory Forum (ASAF) meeting.

Summary of the Issue

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.

Decisions for the Board

1Subject to addressing any matters arising during the meeting, does the Board approve the DCL (Appendix A) and the list of questions to be included in the ITC (Appendix B) for publication following the UKEB March 2026 meeting?

2Does the Board agree with the Secretariat's proposed approach to responding to the ASAF questions?

3Does the Board have any additional questions or key messages they would like to convey to the IASB at the ASAF meeting?

Recommendation

The Secretariat recommends that the Board approves the DCL and accompanying ITC for publication after the UKEB March 2026 meeting.

Appendices

• Appendix A Draft Comment Letter
• Appendix B List of questions to be included in the Invitation to Comment

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 Measurement ².

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 activities ³.

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 risk ⁴, 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.

Background

1On 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.

2The IASB is also conducting field tests of the proposals, with preliminary results due on 31 July 2026, and final results by 30 November 2026.

Draft Comment Letter

Approach

3Given the complex nature of the proposed requirements and the long timeline for comments permitted by the IASB, stakeholders have only been able to share their early assessments of the ED. As such, the Draft Comment Letter attached in Appendix A is at a relatively high level, focused on a limited number of key issues and does not include UKEB specific recommendations. The accompanying Invitation to Comment attached in Appendix B includes specific questions on the proposals to be assessed further with relevant stakeholders during the consultation period. This should help ensure that the final comment letter includes a comprehensive list of issues that are pertinent for the UK.

4This approach was agreed by the Board at its February 2026 meeting, recognising that most stakeholders have only recently finalised their latest annual reporting and 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.

5Similarly, most stakeholders have yet to fully consider how the new model reacts under stress scenarios and whether the results faithfully represent the economic effect of the entity's risk management activities in those circumstances. For example, the implications of credit and liquidity shocks on the proposed amendments have yet to be explored.

6This is an area which the Secretariat plans to consider over the coming months when stakeholders may have had more time to test the new model in stress scenarios.

Contents

7The DCL has been informed by:

1. the Board's initial technical discussion at its February 2026 meeting;
2. desk-based research; and
3. limited stakeholder outreach, including a UKEB's Financial Instruments Working Group RMA Roundtable in January 2026.

8Overall, the DCL welcomes the IASB's efforts to address challenges faced by entities in faithfully representing the economic effect of dynamic repricing risk management activities in financial statements in a way that provides useful information to users of the financial statements.

9However, the DCL also notes that given the variety of dynamic interest rate repricing risk management activities involved, it is important to understand if the current proposals will achieve their objectives in a way that can be implemented in practice without undue cost or effort, and provide useful information to users of financial statements. We believe UK stakeholder feedback, including the results of fieldwork, will be key to assessing this.

10The DCL also highlights some key points around:

1. Objective (including departure from the Conceptual Framework for Financial Reporting),
2. Scope;
3. Risk mitigation adjustment excess; and
4. Transition.

11Early stakeholder feedback indicates that there are a number of areas within RMA that require further clarification and testing. The results of fieldwork will inform the extent of potential further amendments needed. Given the implementation of RMA is expected to be complex, significant amendments to the model may warrant a re-exposure in the future for stakeholders to perform a comprehensive analysis on the updated model. To this end, the Secretariat has included a question in the ITC Question 26 asking stakeholders to comment on whether they think a re-exposure of the proposed amendments would be required based on their analysis and fieldwork (if any) conducted.

12The content of the DCL contains early stakeholder views as well as initial Board and Secretariat analyses which are likely to evolve as the project progresses. As a result, the DCL does not include suggested solutions to most of the issues identified. The Secretariat aims to explore potential solutions as the project progresses. Therefore, as noted in the January 2026 Board papers, the Final Comment Letter (FCL) may differ significantly from the DCL.

Timeline considerations for the publication of the Draft Comment Letter

13As noted in the published PIP, depending on the outcome of the discussion at this meeting, the Board expects to decide whether to publish:

1. the DCL, subject to any necessary amendments, following this meeting with an extended comment period of approximately 60 days; or
2. an updated DCL following its April 2026 meeting with a comment period of at least the minimum required 30 days.

14Based on informal conversations with UK stakeholders to date, the Secretariat believes that it is unlikely there would be significant additional information gathered in the three-week period between the March 2026 Board meeting and when Board papers are due for the April 2026 Board meeting. Therefore, the Secretariat recommends the Board publishes the DCL early to raise awareness about the project and allow more time for stakeholders to react to the DCL. However, we intend to update the Board at its April and May 2026 meetings, if there is significant new information to be reported.

Question for the Board

1Subject to addressing any matters arising during the meeting, does the Board approve the DCL (Appendix A) and the list of questions to be included in the ITC (Appendix B) for publication following the UKEB March 2026 meeting?

Next Steps

15If approved by the Board, the DCL will be published following the March 2026 Board meeting for stakeholder comment on the UKEB website for a comment period of approximately 60 days. Stakeholder outreach will continue whilst the DCL is out for comment.

Accounting Standards Advisory Forum (ASAF) March 2026

16RMA is one of the topics presented by the IASB staff in ASAF on 30 March 2026. The purpose of the session is to:

1. Provide ASAF members with an overview of the IASB's proposals in the ED, and an opportunity to ask questions and share views about the proposed amendments.
2. Gather initial feedback on the level of stakeholder engagement across different jurisdictions and areas of focus in their discussions.
3. Seek input from ASAF members on priority areas for the IASB's education and outreach efforts.

17To this end, the IASB is asking feedback on the questions below. In the following paragraphs the Secretariat presents, for Board consideration, a recommended approach to responding to those questions.

ASAF Question 1 – Do you have any questions regarding the proposals in the Exposure Draft?

18The Secretariat recommends asking the IASB whether the comment deadline for the ED can be aligned with the final fieldwork deadline given stakeholder feedback, including fieldwork results, is key for the UKEB to providing a comprehensive response in its Final Comment Letter.

ASAF Question 2 – Do you have any initial feedback on the level of stakeholder engagement in your jurisdiction and the areas of focus in their discussions? In your view, what should be the priority areas for the IASB's education and outreach efforts?

19The Secretariat recommends informing the IASB that most UK stakeholders are still in their early stages of analysing the proposals and conducting fieldwork, with their current focus being on whether the new model is suitable for their risk management strategies and activities on a business-as-usual basis.

20Typical areas of focus in discussions with UK stakeholders thus far include:

1. The extent to which RMA, including the illustrative examples provided, appears to differ from their current interest rate repricing risk management strategies and activities, such as the proposed requirements in relation to repricing time bands.
2. The potential implications of applying the risk mitigation adjustment excess test.

21In addition to the areas listed above, the Secretariat believes that the following areas should also be prioritised for the IASB's education and outreach efforts as the Secretariat believes that guidance in the ED and illustrative examples is limited:

1. The construction of benchmark derivatives and the adjustments required when there are unexpected changes in the underlying portfolios.
2. How RMA is intended to function when fair value-based measures such as a present value per basis point measure are used.

ASAF Question 3 - Do you have any initial views on the proposals in the ED, including:

• whether it could result in companies providing useful information about their repricing risk management activities;
• the key practical challenges to implementation; and
• whether there are any potential unintended consequences.

22The Secretariat recommends emphasising to the IASB that most UK stakeholders are still in their early stages of analysing the proposals and conducting fieldwork, and therefore the UKEB's views may evolve as the project progresses.

23In terms of expressing the UKEB's early views, the Secretariat recommends highlighting the key points in the cover letter of the DCL.

Questions for the Board

2Does the Board agree with the Secretariat's proposed approach to responding to the ASAF questions?

3Does the Board have any additional questions or key messages they would like to convey to the IASB at the ASAF meeting?

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DRAFT FOR DISCUSSION

[Dr Andreas Barckow] Chairman International Accounting Standards Board Columbus Building 7 Westferry Circus Canary Wharf London E14 4HD

[XX July 2026]

Dear [Dr Barckow]

Exposure Draft IASB/ED/2025/1 Risk Mitigation Accounting—Proposed amendments to IFRS 9 and IFRS 7

1The UK Endorsement Board (UKEB) welcomes the opportunity to provide comment on the International Accounting Standards Board's (IASB) Exposure Draft (ED) Risk Mitigation Accounting—Proposed amendments to IFRS 9 and IFRS 7. To develop our [draft] response, our work [to date] has included in-house research and [initial] consultations with stakeholders in the UK, including preparers, accounting firms and users of accounts. [This work continues and will inform our final comment letter.]

2We welcome the IASB's efforts to address challenges faced by entities in faithfully representing the economic effect of dynamic repricing risk management activities in financial statements in a way that provides useful information to users of financial statements.

3However, given the variety of dynamic interest rate repricing risk management activities involved, it is important to understand if the current proposals will achieve their objectives in a way that can be implemented in practice without undue cost or effort and provide useful information to users of financial statements.

4This letter and the detailed comments in the Appendix reflect the UKEB's current views and are likely to evolve as more information becomes available from the stakeholders' field-testing work that is underway in parallel. The key points we would like to highlight are presented in the paragraphs that follow.

Objective

5We support the IASB's intention to introduce Risk Mitigation Accounting (RMA) with an objective for financial statements to better represent the economic effect of an entity's risk management activities, if the entity manages repricing risk on a net basis.

6However, we observe that full alignment between accounting and risk management practices is unlikely to be achievable when RMA is implemented. In addition, interest rate environments differ across jurisdictions and, although there are common features to various approaches to interest rate risk management, there is no consistent approach to managing repricing risk amongst different banks across different jurisdictions. As a result, we expect that RMA would not achieve a full reflection of all aspects of repricing risk management in the financial statements.

7We observe that RMA, as currently proposed, departs from the Conceptual Framework for Financial Reporting (Conceptual Framework), as the recognition of the risk mitigation adjustment on the balance sheet would not be consistent with the definition of an asset or a liability in the Conceptual Framework.

8[Further work is needed to assess if such departure is justified to fulfil the objective of risk mitigation accounting by providing more useful information on repricing risk activities to users of financial statements, in a manner that is operational without undue cost or effort.] [See Invitation to Comment (ITC) - Question 1]

Scope

9The scope of the proposed amendments is entities that manage repricing risk on a net basis using derivatives, such as banks. Entities including insurers and corporates with large treasury functions may also be captured within this scope.

10[While we support an approach that is not restricted to a specific industry, we are aware the proposed model was developed with banks' risk management practices in mind. Further work needs to be undertaken to assess the actual extent of the scope and whether the proposed model would be suitable for non-banks. Preliminary stakeholder feedback indicates that there appear to be considerable challenges in applying the proposals, as currently drafted, for UK insurers.] [See ITC - Question 3]

Risk Mitigation Adjustment Excess

11We have identified a number of technical matters in the proposed amendments in the Appendix [that may require further assessment], the most significant of which relates to the risk mitigation adjustment excess test. In principle, we support the proposed requirement for entities to assess if the risk mitigation adjustment might not be fully realised over the mitigated time horizon at each reporting date. [However, the extent to which the proposals would achieve their intended outcome remains to be seen at this stage. Early stakeholder feedback has identified that the proposals in this area may not work as intended in certain scenarios.] [See ITC – Questions 12 – 15]

Transition

12Given the complexity of RMA, we believe that a longer timeline for transitioning to RMA (or to general hedge accounting requirements under Chapter 6 of IFRS 9 Financial Instruments if an entity elected to do so) is warranted if and when the proposed amendments are finalised. [See ITC – Question 20]

13Further detail and responses to the IASB's specific questions about the ED are included in the Appendix to this letter.

If you have any questions about this response, please contact the project team at [email protected].

Yours sincerely

Paul Lee Chair UK Endorsement Board

About the UKEB

The UK Endorsement Board is responsible for endorsement and adoption of IFRS Accounting Standards for use in the UK and therefore is the UK's National Standard Setter for IFRS Accounting Standards. The UKEB also leads the UK's engagement with the IFRS Foundation on the development of new standards, amendments and interpretations.

About IFRS in the UK

Approximately [11,000] entities in the UK prepare their financial statements in accordance with IFRS Accounting Standards (Source: HMRC, October 2025). These figures are unconsolidated and include both listed and unlisted entities ⁵. Of these entities, approximately [1,400] have equity listed on UK regulated markets, the London Stock Exchange ⁶ and the Aquis Exchange ⁷.

About this letter

This letter is intended to contribute to the Foundation's due process. The views expressed by the UKEB in this letter are separate from, and will not necessarily affect the conclusions in, any endorsement and adoption assessment on new or amended international accounting standards undertaken by the UKEB.

Question 1—Objective and scope of risk mitigation accounting (Section 7.1)

The IASB proposes that:

1. the objective of risk mitigation accounting be for financial statements to represent the economic effect of an entity's risk management activities if the entity manages repricing risk on a net basis.
2. risk mitigation accounting be applied on a voluntary basis. However, an entity would be permitted to apply risk mitigation accounting if, and only if, the entity mitigates repricing risk on a net basis and the entity's business and risk management activities have the characteristics specified in paragraph 7.1.4.
3. an entity be required to document formally how it will apply risk mitigation accounting.

Paragraphs BC11–BC37 of the Basis for Conclusions explain the IASB's rationale for these proposals.

Do you agree with these proposals? Why or why not? If you disagree with any of these proposals, please explain what you would suggest instead and why.

Objective

A1We support RMA's objective for financial statements to ‘better' represent the economic effect of an entity's risk management activities, if the entity manages repricing risk ⁸ on a net basis. We also support RMA providing information about the purpose and effect of derivatives used to mitigate repricing risk.

A2However, as the IASB acknowledges, full alignment between accounting and risk management practices are unlikely to be achievable, as each are likely to have differences in their objectives ⁹.

A3In addition, interest rate environments differ and, although there are common features to various approaches to interest rate risk management, there is no consistent approach to managing repricing risk amongst different banks across jurisdictions. As a result, we do not expect the proposed RMA could reflect every bank's existing risk management practice.

A4For example, the items that are eligible for inclusion in the RMA underlying portfolios might not be fully aligned to an entity's risk management practice. Differences in eligible items would then have a knock-on effect on the identification of the designated derivatives related to those eligible items for purposes of the proposed RMA. (Refer also to our response in Question 4).

A5While such misalignment might be necessary, further work is needed to understand whether the proposed RMA could still meet the underlying risk management objectives in a way that is both able to be implemented in practice, without undue cost or effort, and provides useful information to users of financial statements.

A6A particular area of focus should be the potential implications for small and medium sized organisations, for which the application of the proposed RMA could be particularly challenging.

Credit risk

A7We consider the interaction of the proposed model (with a focus on repricing risk), and the effect of credit risk should be further clarified. While the proposals make it clear that the effect of credit risk should not dominate the changes in the fair value of the designated derivatives, they are silent in relation to the consideration of the effects of credit risk in the net repricing risk exposure.

A8We suggest further clarification and guidance from the IASB with respect to how credit risk is intended to interact with the various aspects of RMA, such as the underlying portfolios, net repricing risk exposure, benchmark derivatives, the risk mitigation adjustment and discontinuation.

Voluntary application

A9We support the proposed approach for entities to be permitted, but not required, to apply RMA, if they meet the criteria to be in scope of the proposals. The approach proposed by RMA is complex, and entities should be allowed to assess their likely costs and benefits of applying the proposals. Such an approach would be consistent with the existing voluntary application of hedge accounting requirements in IFRS 9 and IAS 39.

Scope

A10The scope of the proposed amendments is entities that manage repricing risk on a net basis using derivatives. Entities including banks, insurers and corporates with large treasury functions could fall within this scope.

A11While we support an approach that is not restricted to a specific industry, we are aware that the proposed model was developed with banks' risk management practices in mind. Further work needs to be undertaken to assess the actual extent of the scope and whether the proposed model would be suitable for non-banks. Preliminary stakeholder feedback indicates that there appear to be considerable challenges in applying the proposals, as currently drafted, for UK insurers. (See further information in Question 11 below).

A12The importance of clearly defining the scope for the proposals is highlighted by the fact that entities that are in scope, but that decided not to apply RMA, would be required to provide qualitative disclosures about their repricing risk management activities. This is a change from existing disclosure requirements on hedge accounting in IFRS 7 Financial Instruments: Disclosures where similar disclosures are not currently required if general hedge accounting is not applied. (Refer also to our response in Question 10).

Level of application

A13In principle, we support the IASB proposal to require entities to apply RMA at the level at which the entity mitigates the repricing risk arising from underlying portfolios in accordance with its risk management activities.

A14However, this might give rise to application challenges given that within a single organisation risk mitigation may take place at several levels. For example, risk mitigation may take place first at a subsidiary (or branch) level and subsequently at a higher consolidated level. Further work is needed to understand the practical implications of this requirement.

Formal documentation

A15We support the proposed requirement for an entity to formally document how it would apply the RMA requirements for each subset of underlying portfolios that is separately managed for repricing risk on a net basis.

A16However, as noted in above, the proposed RMA may result in a risk mitigation strategy for accounting purposes that may not be fully aligned with an entity's risk management practices. Therefore, an entity may be required to maintain dual formal documentation of their risk management strategy - for risk management and for accounting purposes - respectively. Further work will inform the likely complexity and additional operational burden for entities.

Question 2—Underlying portfolios (paragraphs 7.2.1-7.2.4)

The IASB proposes that risk mitigation accounting be applied based on underlying portfolios—that is, portfolios of financial instruments that expose an entity to repricing risk. The IASB proposes that financial instruments be eligible for inclusion in underlying portfolios only if they are:

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 Financial Instruments);
2. financial liabilities classified as subsequently measured at amortised cost (in accordance with paragraph 4.2.1 of IFRS 9); or
3. future transactions that could result in the recognition or derecognition of financial instruments specified in (a) or (b).

The IASB is also proposing that an entity apply risk mitigation accounting only to its exposure to repricing risk that is not otherwise mitigated. However, if a financial instrument is designated as a hedged item for a risk other than repricing risk, the hedged exposure would be eligible for inclusion in underlying portfolios.

Paragraphs BC38–BC63 of the Basis for Conclusions explain the IASB's rationale for these proposals.

Do you agree with these proposals? Why or why not? If you disagree with any of these proposals, please explain what you would suggest instead and why.

Underlying portfolios

A17We generally support the proposed amendments related to underlying portfolios, including allowing the inclusion of financial instruments that give rise to repricing risk only on a portfolio basis (e.g. demand deposits). However, we are concerned about how RMA interacts with financial assets subsequently measured at fair value through other comprehensive income (FVOCI) as described below.

FVOCI assets

A18We understand that some UK banks include FVOCI assets in their repricing risk management strategy and therefore would include them in the underlying portfolios. This means that the interest rate risk of such assets is already reflected on the balance sheet. As the risk mitigation adjustment, which represents the effective portion of the fair value changes due to changes in interest rates, is also recognised on the balance sheet, an entity's net assets may potentially be overstated or understated which could in turn lead to increased volatility on the balance sheet and have potential wider implications.

A19We question whether the departure from the Conceptual Framework of Financial Reporting to recognise the risk mitigation adjustment as an asset or liability is justified in relation to the proposed inclusion of FVOCI assets in underlying portfolios as the accounting effect above introduced by the model does not appear to faithfully represent the economic effect of the entity's risk management activities.

Items which are treated as fixed rate exposures

A20We believe that both the fixed rate pricing and the volume of forecast transactions should meet the highly probable criterion in order for such transactions to be treated as fixed rate exposures. This requirement does not appear to be included in the ED, and it is unclear whether this is the intended interpretation in paragraph BC55 of the Basis for Conclusions and paragraph IE193(b) in the Illustrative Examples ¹⁰. We recommend that the IASB include specific application guidance in Appendix B of the ED and provide better explanations in the accompanying documents to improve the clarity of this proposed requirement.

A21We also believe the clarity on the treatment of a portion of customer deposits repayable on demand as fixed rate exposures in paragraph IE197(d) of the Illustrative Examples can be improved by explaining that the “estimate is based on the very low sensitivity [...]”.

Question 3—Determining the net repricing risk exposure (paragraphs 7.2.5-7.2.10)

The IASB proposes that an entity determine the net repricing risk exposure by aggregating the repricing risk arising from underlying portfolios by repricing time bands based on expected repricing dates. The expected repricing date is the earlier of the dates on which financial instruments in the underlying portfolios are expected to be settled or to reprice.

The IASB also proposes that the entity determine the net repricing risk exposure in a manner that is consistent with how it makes risk management decisions, including with regard to:

1. the basis on which the entity aggregates the repricing risk arising from underlying portfolios and determines the repricing time bands (based on expected repricing dates); and
2. the measure the entity uses to quantify the repricing risk exposure in each repricing time band.

Paragraphs BC64–BC69 of the Basis for Conclusions explain the IASB's rationale for these proposals.

Do you agree with these proposals? Why or why not? If you disagree with any of these proposals, please explain what you would suggest instead and why.

A22While the proposed amendments require an entity to determine the net repricing risk exposure (NRRE) consistently with how its risk management decisions are made, early stakeholder feedback suggests that the proposed requirements to quantify the NRRE and restrict the risk mitigation objective to be within the amount of NRRE in each repricing time band may not be suitable for certain risk management strategies. Further application guidance and illustrative examples from the IASB would be welcome to alleviate concerns in this area.

A23For example, early stakeholder feedback indicates that the proposed amendments may not be a good fit when a present value per basis point measure is used for risk management purposes, which we understand is a risk management measure used in the UK. For such measures, the sensitivity to repricing risk is higher and therefore more concentrated close to the maturity date of the financial instruments.

A24This type of risk management may not be allowed within RMA when the maturity dates of the designated derivative (e.g. an interest rate swap) and the relevant financial instruments that underlie the NRRE are in different repricing time bands since the risk mitigation objective would exceed the NRRE in the repricing time band where the designated derivative matures.

Question 4—Designated derivatives (Section 7.3)

The IASB proposes that only interest rate derivatives with a party external to the reporting entity that are used to mitigate the entity's repricing risk in accordance with its risk management strategy be eligible to be included as designated derivatives.

Paragraphs BC70–BC77 of the Basis for Conclusions explain the IASB's rationale for these proposals.

Do you agree with these proposals? Why or why not? If you disagree with any of these proposals, please explain what you would suggest instead and why.

A25We generally support the IASB's proposals in relation to designated derivatives, noting that they are similar to existing hedge accounting requirements for hedging instruments under Chapter 6 of IFRS 9.

A26However, we think there is a lack of clarity on how RMA functions when non-linear derivatives, such as options, are used to mitigate repricing risk. For example, there does not appear to be guidance on how the time value of options are accounted for under the proposed model.

A27From an operational perspective, where there are differences between the items being risk managed in practice and the items eligible for inclusion in the underlying portfolios, we believe it may also be difficult to identify the relevant derivatives to be included in or excluded from RMA given the dynamic nature of the risk management strategies.

Question 5—Risk mitigation objective and benchmark derivatives (paragraphs 7.4.1-7.4.7)

The IASB proposes that an entity:

1. specify a risk mitigation objective that is consistent with the amount of repricing risk the entity mitigates using designated derivatives, but does not exceed the amount of net repricing risk exposure in each repricing time band;
2. construct benchmark derivatives to replicate the timing and amount of repricing risk as specified in the risk mitigation objective; and
3. adjust the amount of repricing risk represented by the benchmark derivatives if unexpected changes in financial instruments included in underlying portfolios reduce the net repricing risk exposure to an amount below the risk mitigation objective specified at the beginning of the period.

Paragraphs BC78–BC87 of the Basis for Conclusions explain the IASB's rationale for these proposals.

Do you agree with these proposals? Why or why not? If you disagree with any of these proposals, please explain what you would suggest instead and why.

A28We support a risk mitigation objective that is consistent with the amount of repricing risk the entity mitigates using designated derivatives. However, as noted in our response to Question 3, further work is needed to assess the implications of the requirement that the risk mitigation objective does not exceed the amount of net repricing risk exposure in each repricing time band and whether this proposed requirement would be suitable for risk management strategies typically applied in the UK.

A29In addition, we support the use of benchmark derivatives that represent the timing and amount of repricing risk specified in the risk mitigation objective. Conceptually, benchmark derivatives are similar to the 'hypothetical derivatives' currently used in cash flow hedge accounting ¹¹.

A30However, we recommend that the IASB should consider providing additional guidance in relation to the construction of benchmark derivatives, for example:

1. the determination of the repricing date for a benchmark derivative within a repricing time band (e.g. at the beginning, middle point or end, or other approach); and
2. the construction of benchmark derivatives when the underlying portfolios contain optionality (i.e. prepayments) and the requirement for benchmark derivatives to have an initial fair value of zero. The interaction with the designated derivatives should also be considered (e.g. when hedging with options as designated derivatives which would likely have a non-zero fair value at inception). For the latter refer to A26 above.

A31Another aspect we consider further guidance would be welcome is in relation to the acceptable approaches for adjusting the benchmark derivatives to capture the effects of 'unexpected changes' in the underlying portfolios as well as examples of circumstances when the operational simplification (in proposed paragraph B7.4.14) could be applied.

Question 6—Recognising and measuring the risk mitigation adjustment (paragraphs 7.4.8-7.4.14)

The IASB proposes that an entity:

1. recognise the risk mitigation adjustment in the statement of financial position based on the lower of:
   1. the cumulative gains or losses on the designated derivatives; and
   2. the cumulative change in the fair value (present value) of the benchmark derivatives;
2. recognise in profit or loss the amount accumulated as the risk mitigation adjustment in the same periods during which the repricing differences arising from the financial instruments in the underlying portfolios affect profit or loss;
3. assess, at each reporting date, whether there is an indication that the risk mitigation adjustment might not be realised in full over the mitigated time horizon; and
4. recognise immediately in profit or loss a reduction in the amount accumulated as the risk mitigation adjustment if it exceeds the present value of the net repricing risk exposure as at the reporting date.

Paragraphs BC88–BC116 of the Basis for Conclusions explain the IASB's rationale for these proposals.

Do you agree with these proposals? Why or why not? If you disagree with any of these proposals, please explain what you would suggest instead and why.

Risk mitigation adjustment

A32We support measuring the risk mitigation adjustment based on the lower of the cumulative gains or losses on the designated derivatives and the cumulative change in the fair value (present value) of the benchmark derivatives since this means that only the effective portion is recognised.

A33We also support the release of the risk mitigation adjustment in the same periods during which the repricing differences arising from the financial instruments in the underlying portfolios affect profit or loss as this reflects the economic effect of an entity's risk management activities.

A34The above proposed features of the new model draw from existing requirements on cash flow hedge accounting ¹² and therefore would be expected to function in a similar manner.

A35However, we believe that paragraph 7.4.8 of the ED could be articulated more clearly. The release of the risk mitigation adjustment to profit or loss, including any excess amounts recognised, could mean that the risk mitigation adjustment on the balance sheet is not always be measured at the lower of the cumulative gains or losses on the designated derivatives and the cumulative change in the fair value (present value) of the benchmark derivatives. We recommend that the IASB address this through redrafting of the proposed amendment.

Risk mitigation adjustment excess

A36We support the proposed requirement for entities to assess if the risk mitigation adjustment might not be realised in full over the mitigated time horizon at each reporting date. Given the complexity and the dynamic nature of the relevant interest rate risk management activities, a 'backstop' test is important to ensure that significant amounts of risk mitigation adjustment, which cannot be realised over the mitigated time horizon, do not remain on the balance sheet.

A37It remains to be seen whether the proposed amendments in this area function as intended. We have heard an early stakeholder view that there are certain scenarios where the proposed requirements could lead to counterintuitive results.

A38A relatively simple example is when an entity enters into a derivative (e.g. interest rate swap) for risk mitigation purposes after interest rates have moved instead of when the relevant items in the underlying portfolio were originated. If the interest rates then revert back to their original level, performing the quantitative comparison ¹³ within the proposed assessment could lead to recognising excess amounts when the risk mitigation activity is fully effective.

A39Whilst a change in interest rates would not trigger ¹⁴ the quantitative comparison above on its own, unexpected changes in the wider underlying portfolio could trigger the test if such changes cannot be fully reflected via adjustments to the benchmark derivatives and the entity assesses that the risk mitigation adjustment might not be fully realised over the mitigated time horizon.

A40The example above interprets the present value of the NRRE as measured in paragraph 7.4.12 of the ED to have a start date that is aligned with the date of origination of the relevant items in the underlying portfolio.

A41Alternatively, the start date could be interpreted to be aligned to the date the derivative was entered into, which could potentially resolve this particular issue. However, we envision this to be much more complex to put into practice as a lot more tracking of changes would likely be required.

A42We therefore suggest that the IASB clarify how the present value of the NRRE should be measured in the ED and to consider the consequences of this clarification on RMA, including on transition.

A43In relation to the determination of the present value of the NRRE, we also believe additional clarity is needed to explain the rationale for the method of adjustment for variable-rate excess in paragraph IE228 of the Illustrative Examples.

Question 7—Discontinuation of risk mitigation accounting (Section 7.5)

The IASB proposes that an entity discontinue risk mitigation accounting prospectively from the date on which the entity's risk management strategy changes—that is, when the entity changes how it manages repricing risk, including a change to the mitigated rate.

The IASB also proposes that an entity that discontinues risk mitigation accounting recognise the amount accumulated as the risk mitigation adjustment in profit or loss:

1. on a systematic and rational basis over the mitigated time horizon, if the repricing differences arising from the financial instruments in underlying portfolios are still expected to affect profit or loss; or
2. immediately, if the repricing differences arising from the financial instruments in underlying portfolios are no longer expected to affect profit or loss.

Paragraphs BC117–BC126 of the Basis for Conclusions explain the IASB's rationale for these proposals.

Do you agree with these proposals? Why or why not? If you disagree with any of these proposals, please explain what you would suggest instead and why.

A44We agree with the IASB's conclusion ¹⁵ to prohibit voluntary discontinuation of RMA to avoid an entity applying RMA purely to achieve favourable accounting outcomes. This is consistent with the requirements in IFRS 9 that prohibit voluntary de-designation of a hedging relationship and the discontinuation of hedge accounting when the risk management objective for a particular hedging relationship remains the same, and all the other qualifying criteria are met.

A45As a result, we support prospective discontinuation of RMA only if the entity changes its risk management strategy. However, further work is needed to confirm if further application guidance might be needed to identify circumstances that represent a change to an entity's risk management strategy versus those that do not.

A46We support the proposed accounting for the discontinuation of RMA, that is, that the accounting for the amount accumulated as the risk mitigation adjustment would vary depending on whether the repricing differences from the financial instruments in the underlying portfolios are still expected to affect profit or loss.

A47In addition, we recommend the IASB provides clarity as to whether an assessment of potential risk mitigation adjustment excess should be conducted upon discontinuation of risk mitigation accounting.

Question 8—Effective date and withdrawal of IAS 39 (Section C1 of Appendix C to IFRS 9)

The IASB proposes that an entity be permitted to apply the requirements for risk mitigation accounting from the beginning of the annual reporting period starting on or after [the date the requirements are issued].

The IASB also proposes that an entity discontinue applying the hedge accounting requirements in IAS 39 Financial Instruments: Recognition and Measurement at the earlier of:

1. the date on which the entity first applies the requirements for risk mitigation accounting; and
2. annual reporting periods beginning on or after [the date on which IAS 39 is withdrawn].

Paragraphs BC127–BC128 of the Basis for Conclusions explains the IASB's rationale for these proposals.

Do you agree with the proposal to withdraw IAS 39? Why or why not? If you disagree, please explain what you would suggest instead and why. If the IASB decides to withdraw IAS 39, do you have any information for the IASB to consider in determining the withdrawal date, for example the time that is likely to be needed to transition from IAS 39?

A48The proposed approach to RMA is 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).

A49As a result, [early] stakeholder feedback has expressed the need for a longer timeline to implement the proposed amendments.

A50A thorough cost benefit analysis should be performed before making a decision on the withdrawal of IAS 39.

Question 9—Transition (Section C2 of Appendix C to IFRS 9)

The IASB proposes that:

1. an entity apply the proposed requirements for risk mitigation accounting prospectively;
2. an entity be permitted to revoke its previous designation of financial assets or financial liabilities as measured at fair value through profit or loss, if those financial instruments will be included in underlying portfolios that the entity uses to determine the net repricing risk exposure;
3. an entity making the transition from IAS 39 discontinue hedge accounting for all hedging relationships and apply paragraphs 6.5.10 and 6.5.12 of IFRS 9 to the related hedge adjustments;
4. an entity making the transition from the hedge accounting requirements in Chapter 6 of IFRS 9 be permitted to discontinue hedge accounting for hedging relationships in which the hedged items are financial instruments that will be included in the underlying portfolios in accordance with paragraph 7.2.1; and
5. an entity be exempt from disclosing the quantitative information required by paragraph 28(f) of IAS 8 Basis of Preparation of Financial Statements in the reporting period in which the entity first applies the amendments.

Paragraphs BC129–BC147 of the Basis for Conclusions explain the IASB's rationale for these proposals.

Do you agree with these proposals? Why or why not? If you disagree with any of these proposals, please explain what you would suggest instead and why.

A51We support a prospective application of the proposed RMA model. However, further transition application guidance is needed to address certain aspects, such as dealing with off-market derivatives on transition to the proposed model.

A52We support permitting entities to revoke their previous designation of financial assets or liabilities as measured at fair value through profit or loss, if those financial instruments will be included in underlying portfolios.

A53In addition, we consider that entities should be permitted to irrevocably designate financial instruments as measured at fair value through profit or loss if the conditions in IFRS 9 paragraphs 4.1.5 or 4.2.2(a) are met on transition. We believe that this could provide an accounting alternative for entities that choose not to apply hedge accounting.

A54We support exempting entities transitioning to RMA from disclosing the quantitative information required by paragraph 28(f) of IAS 8.

A55We also believe that matters arising out of the IASB's Post-implementation Review of IFRS 9—Hedge Accounting should be considered in the context of RMA to the extent they are relevant, since:

1. some features in the proposed RMA model draw from existing hedge accounting requirements under Chapter 6 of IFRS 9; and
2. certain aspects of the proposed amendments are intended to work together with Chapter 6 hedge accounting (e.g. hedged exposures).

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Risk Mitigation Accounting - List of questions to be included in the Invitation to Comment

Objective of risk mitigation accounting

In principle, the UKEB's DCL supports the IASB's intention to introduce Risk Mitigation Accounting (RMA) with an objective for financial statements to better represent the economic effect of an entity's risk management activities, if the entity manages repricing risk on a net basis.

However, the UKEB's DCL also observes that full alignment between accounting and risk management practices is unlikely to be fully achievable and therefore the UKEB does not expect RMA to fully reflect all aspects of repricing risk management in the financial statements.

1If you are a preparer [bank]:

1. Do you consider that RMA (as currently drafted) would reflect the economics of your organisation's risk management practices?
2. Would it result in information that is more useful for the users of your financial statements?

Please explain why or why not. If your answer is no, what would you recommend instead?

Credit risk

2The IASB proposals are silent in relation to the consideration of the effects of credit risk in the net repricing risk exposure. The UKEB's DCL suggests that further clarification and guidance is needed with respect to how credit risk is intended to interact with the various aspects of RMA, such as the net repricing risk exposure, benchmark derivatives, risk mitigation adjustment and discontinuation.

Do you agree with this position? Please explain why or why not.

Scope

The UKEB's DCL supports an approach that it is not restricted to a specific industry, but it also notes that the proposed model was developed with banks' risk management practices in mind.

3If you are a preparer [non-bank]:

1. do you consider that RMA (as currently drafted) would be suitable for your organisation; and
2. would it result in information that it is more useful for the users of your financial statements?

Please explain. It would be helpful if you provide detailed information, including:

1. your industry;
2. a description of potential benefits for your organisation from transitioning to RMA; and
3. a description of challenges you may have identified likely to arise in implementing the proposals and how the model could be changed to accommodate those challenges.

Level of application

4The UKEB DCL supports the IASB proposal to require entities to apply RMA at the level at which the entity mitigates the repricing risk arising from underlying portfolios in accordance with its risk management activities.

Do you agree with this position? Please explain why or why not.

Underlying portfolios

5The UKEB's DCL expresses concerns about how RMA interacts with financial assets subsequently measured at fair value through other comprehensive income (FVOCI) and whether the departure from the Conceptual Framework of Financial Reporting is justified in this instance [paragraphs A18 - A19 of the DCL].

Do you agree with this position? Please explain why or why not. If you have any suggested solutions, please also include them in the response below.

6The UKEB's DCL is generally supportive of the proposed amendments in relation to underlying portfolios [paragraphs 7.2.1 – 7.2.4 of the ED], except for concerns related to financial assets subsequently measured at FVOCI [see ITC question #5 above].

7Do you agree with this position? Please explain why or why not.

We are particularly interested in hearing your views on the following areas and would welcome any feedback you may have:

1. Allowing the inclusion of financial instruments that give rise to repricing risk only on a portfolio basis (e.g. demand deposits) in accordance with paragraph B7.2.2 of the ED.
2. Allowing the use of modelling methodologies, such as replicating portfolios, as a proxy to determine the exposure to repricing risk arising from certain variable-rate financial assets (sometimes referred to as 'equity modelling') in accordance with paragraph B7.2.17 of the ED.
3. Requiring hedge accounting to have been applied first for hedged exposures to be eligible for inclusion in underlying portfolios subject to the requirements in paragraph 7.2.2 of the ED. This requirement is intended to minimise the risk of double-counting between different risk exposures.

8Do you support the proposed amendments above? Please explain why or why not.

Are there any other material items that you include in your interest rate repricing risk management strategy that you think should be eligible for inclusion in the underlying portfolios?

Please provide the rationale for your response.

Determining the net repricing risk exposure

9The UKEB's DCL notes that the proposed amendments related to determining the net repricing risk exposure may not be a good fit when a present value per basis point ¹⁶ measure is used for risk management purposes [paragraphs A23 – A24 of the DCL].

Are the proposed amendments in paragraphs 7.2.5 – 7.2.10 of the ED suitable for your organisation's interest rate repricing risk management strategy and activities?

Please explain why or why not. If they are not suitable, please also provide suggested changes to the proposals in the ED, if any.

Risk mitigation objective

10The UKEB's DCL is generally supportive of the proposed amendments in relation to risk mitigation objective [paragraphs 7.4.1 – 7.4.4 of the ED].

Have you identified any likely challenges from the requirement that the risk mitigation objective does not exceed the amount of net repricing risk exposure in each repricing time band? Please provide further information of the circumstances where those challenges are likely to arise and any potential solutions you would recommend.

Benchmark derivatives

11The UKEB's DCL is generally supportive of the proposed use of benchmark derivatives [paragraphs 7.4.5 – 7.4.7 of the ED]. However, it also identifies aspects of the proposals where enhanced clarity is recommended.

Do you have any views or recommendations in relation to any of the following?

1. Determination of the date for a benchmark derivative within a repricing time band (e.g. at the beginning, middle point or end, or other approach).
2. Approach for adjusting the benchmark derivatives to capture the effects of 'unexpected changes' in the underlying portfolios.
3. The construction of benchmark derivatives when the underlying portfolios contain optionality (i.e. prepayments) and the requirement for benchmark derivatives to have an initial fair value of zero. As well as the interaction with non-linear designated derivatives (e.g. when hedging with options).

Please share any additional feedback or recommendations you have in relation to benchmark derivatives.

Risk mitigation adjustment excess

12Is the IASB's method of determining the amount of risk mitigation adjustment excess to be recognised at each reporting date [paragraphs 7.4.12 – 7.4.13 of the ED] practical and suitable for your risk management strategies and activities?

Please explain why or why not, including whether you prioritise managing the changes in the economic value of equity or the changes in net interest income. If you have any suggested solutions, please also include them in the response below.

13The UKEB's DCL notes that there may be certain scenarios where the proposed amendments could lead to counterintuitive results. The DCL also requests that the IASB provide clarification on how the present value of the net repricing risk exposure should be measured and to consider the consequences of this clarification on RMA, including on transition [paragraphs A37 – A42 of the DCL].

Is this a material issue for your organisation? Do you agree with the request for clarification on determining the present value of the net repricing risk exposure? Please explain why or why not. If you have any suggested solutions, please also include them in the response below.

14Where macro hedge accounting under IAS 39 is applied, how do you currently ensure that no excess amounts are accumulated in other comprehensive income that are not expected to be recovered in one or more future periods? In your view, is there a significant difference between how this is currently achieved and the method proposed in paragraphs 7.4.11 – 7.4.14 of the ED? What are the implications of such differences, if any, to your organisation's current practices?

15Have you identified any other issues in relation to the proposed amendments in this area? For example, is the risk mitigation adjustment excess test triggered too frequently?

Please provide examples, where relevant, to support your response. Please also provide suggested solutions, if any.

Discontinuation of risk mitigation accounting

16The UKEB's DCL is generally supportive of the proposed requirements on discontinuation of risk mitigation accounting [paragraphs 7.5.1-7.5.3].

Do you agree with this position? Please explain why or why not.

17Do you believe that an assessment of potential risk mitigation adjustment excess should be conducted upon discontinuation of risk mitigation accounting? Please explain why or why not.

Effective date

18In your view, what is the earliest effective date for the proposals the IASB should consider?

Withdrawal of IAS 39

19Have you identified any challenges likely to arise for your organisation from the withdrawal of IAS 39? Please explain and share any potential recommendations to address those likely challenges.

Transition

20The UKEB's DCL is generally supportive of the proposed transition requirements [paragraphs C2.54-C2.61].

Have you identified areas where additional application transition guidance is needed? Please explain.

21The UKEB's DCL considers that entities transitioning from IAS 39 to IFRS 9 should be permitted an irrevocable election to reconsider their designation of financial instruments as measured at fair value through profit or loss in accordance with IFRS 9 paragraphs 4.1.5 and 4.2.2(a).

Do you agree with this position? Please explain why or why not.

Disclosure requirements

Risk mitigation adjustment excess

22To improve the quality of information provided to users, the UKEB's DCL recommends that there is an explicit requirement to disclose and explain:

1. the cause of the recognition of risk mitigation adjustment excess in the reporting period, if material; and
2. how this has affected the expected profile of the release of the risk mitigation adjustment to profit or loss.

[paragraph A58 of the DCL]

Do you agree with this position? Please explain why or why not.

General

23Do you think the proposed disclosure requirements specified in paragraphs 30F - 30P of the ED provide useful information to users of the financial statements?

Please explain why or why not. If you do not think so or think that there are other information that should be disclosed, please provide suggested disclosure requirements.

24Entities whose business and risk management activities have the characteristics specified in paragraph 7.1.4 of the ED but that choose not to apply risk mitigation accounting, are required to provide a qualitative explanation of how they manage repricing risk in accordance with paragraph 33A of the ED.

Do you think the expected benefits of this proposed requirement to users outweigh the expected costs of preparing this disclosure for such entities? Please explain why or why not.

Entities that issue insurance contracts as defined in IFRS 17 Insurance Contracts

25While insurance contract assets and liabilities are currently not eligible to be included in underlying portfolios in accordance with paragraph 7.2.1 of the ED, the IASB has included specific questions below for entities that issue insurance contracts as defined in IFRS 17 which asks respondents to assume they are eligible for inclusion.

Based on the proposals in the ED:

1. please describe the extent to which your risk management strategy and activities align with, or differ from, the descriptions in paragraphs 7.1.1 – 7.1.2; and
2. please describe the extent to which your business and risk management activities align with, or differ from, the characteristics described in paragraph 7.1.4.

Would the proposals for risk mitigation accounting in the ED achieve the IASB's objective of better representing in the financial statements the economic effects of your activities for managing repricing risk compared with the currently available accounting options? Please explain why or why not, and what you would suggest instead.

Other

26Based on your analysis and fieldwork (if any) of the ED,

1. Are there any areas that you think would benefit from further exploration, such as a re-exposure ¹⁷ of the proposed amendments?
2. If so, what are they and why?

We would also welcome any suggested solutions you may have.

27Do you have any other comments on the IASB's ED or the UKEB's DCL you would like to share?

Response generation

28Did you/your organisation use a large language model (e.g. Chat GPT, Microsoft Copilot) to create any part of your/its response (response to this Invitation to Comment or a comment letter you are submitting as part of your response)?

If yes, please specify which model and what prompt(s) you used for the large language model.

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Footnotes

the timing of when financial instruments reprice to benchmark interest rates; and

the amount of financial instruments that reprice in a particular period.

the timing of when financial instruments reprice to benchmark interest rates; and

the amount of financial instruments that reprice in a particular period.