Risk Mitigation Accounting

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Risk Mitigation Accounting

Planned amendments to IFRS 9 and 7 and prospective replacement of IAS 39 macro hedge accounting

Institutions generally manage their interest rate risk on the basis of open portfolios in order to take account of constant changes in risk positions. However, the current provisions of IFRS 9 and IAS 39 on hedge accounting can only reflect the net management of open portfolios with regard to interest rate-related price risks (repricing risks) to a limited extent. With the exposure draft standard “Risk Mitigation Accounting – Proposed Amendments to IFRS 9 and 7,” the IASB is now presenting an approach that is intended to better reflect the actual management of interest rate risk in accounting.

What are the weaknesses of current hedge accounting models with regard to repricing risks?

Closed portfolios

- IFRS 9 / IAS 39 is designed for closed portfolios

- Open portfolios are represented as changing closed portfolios

Operational complexity

- High costs for tracking, amortization, and OCI reclassifications

Alignment gap

- Risk management manages net exposure per time band

Transparency

- Accounting does not always reflect the actual net exposure being managed.

- Necessary simplifications reduce comprehensibility for financial statement readers

P&L Timing

- Underlyings take effect on the repricing date through P&L

- P&L effect of derivatives on changes in market value

How does the risk mitigation accounting model work?

Risk Mitigation Accounting (RMA) aims to transparently reflect the economic impact of net repricing risk management in open portfolios in the financial statements. To this end, underlying portfolios (net-managed holdings/transactions with repricing risk) are first defined and the risks are aggregated with expected repricing dates in repricing time bands (time buckets) to form a net repricing risk exposure (NRRE) (net gap per bucket).

On this basis, the company defines its risk mitigation objective for each time bucket and uses designated derivatives (interest rate derivatives actually used to mitigate net risk). Benchmark derivatives (synthetic comparison derivatives) are constructed and adjusted as necessary to reflect the control objective.

A balance sheet risk mitigation adjustment is determined as the lower of the cumulative effects of designated and benchmark derivatives and is reversed in the same period as the revaluation effects from the underlying portfolio. This mechanism shifts the changes in market value of the designated derivatives – in line with the management objective – to the periods in which the repricing risk of the underlying portfolio becomes effective.

(1) RMA model

(2) Reporting and disclosure implications

Which standards are affected?

The proposed amendments by the IASB in the Exposure Draft dated December 3, 2025, include

IFRS 9

New Chapter 7 in Appendix C, “Risk Mitigation Accounting”
Introduction of benchmark derivatives and risk mitigation adjustment as core mechanisms
Removal of all references to IAS 39 hedge accounting option in the event of a withdrawal of IAS 39

IAS 39

Discontinuation of IAS 39 hedge accounting after initial application of RMA (no parallel application of both systems)
The IASB is proposing for discussion whether the proposed RMA rules should replace the remaining IAS 39 provisions on macro hedge accounting, thereby allowing IAS 39 to be repealed

IFRS 7

Risk mitigation adjustment as a one-line item in the balance sheet and statement of comprehensive income
Tabular information on underlying portfolios, designated derivatives, net repricing risk exposure, opening and closing balances of risk mitigation adjustment items
Qualitative disclosure in the notes, if risk mitigation accounting is not applied even though the company's risk management activities would allow it to be applied

The application of risk mitigation accounting does not change the measurement of the financial instruments affected under IFRS 9.

Risk mitigation accounting is designed as an option: if a company meets the requirements, it can voluntarily implement risk mitigation accounting, but it can also continue to apply IFRS 9 hedge accounting or not engage in hedge accounting (with corresponding disclosure in accordance with IFRS 7).

Our services

WTS Advisory is your partner for early analysis of requirements, preliminary studies, and gap analyses, as well as for setting up the operating model:

Know-how sharing on the valuation, booking, and disclosure of repricing risks in accordance with RMA
Optimization of reporting structures and processes between treasury, risk controlling, and accounting
Support in determining balance sheet and income statement effects
Support in implementing the RMA booking system

If you are interested or have any questions about risk mitigation accounting, please do not hesitate to contact us.

Michèle Färber

Partner Advisory

Michele.Faerber@wts.de

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Further topics you could be interessted in

Valuation of Derivatives and Financial Instruments

IRRBB – interest rate risks in the banking book

Hedge Accounting

Optimization of Reporting Structures and Processes

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