[Global Financial Insights] Key FASB and IASB Updates on Hedge Accounting and Risk Reporting

[2025] 181 taxmann.com 128 (Article)

Global Financial Insights is a weekly feature for the Accounts and Audit Module subscribers of Taxmann.com. It provides you with the latest updates on financial reporting and auditing practices from across the globe. Here is this week’s financial update:

1. Financial Accounting Standard Board Issues an Accounting Standard Update on Hedge Accounting Guidance

The Financial Accounting Standard Board (FASB) has issued an update to clarify certain aspects of the guidance on hedge accounting. This update also addresses several incremental hedge accounting issues arising from the global reference rate reform initiative.

Earlier in 2017, the FASB introduced a comprehensive Accounting Standard (AS) on derivatives and hedging to enhance the alignment between an entity’s risk management activities and their presentation in the financial statements. Following its issuance, stakeholders raised several queries seeking clarification on specific aspects of the guidance. In response, the FASB has released this Accounting Standard Update (ASU), addressing stakeholder concerns and providing refinements in five key areas.

(a) Similar risk assessment for cash flow hedges

The amendments in this update improve Generally Accepted Accounting Principle (GAAP) by allowing more types of risks to be combined when grouping forecasted transactions. This means companies can apply hedge accounting to a wider range of future transactions. By grouping more items together, companies can use hedge accounting more efficiently and at a lower cost.

(b) Hedging forecasted interest payments on choose-your-rate debt instruments

The amendment offers a clear method for applying cash flow hedge accounting to forecasted interest payments on variable-rate loans where the borrower can choose different interest rate indexes and reset periods (often called “choose-your-rate” loans). Under this model, the loan agreement lists the alternative rate indexes and reset periods that an entity may select as being hedged during the hedging relationship.

(c) Cash Flow hedges of non-financial forecasted transactions

Under the said amendment the companies are allowed to use hedge accounting for more types of forecasted purchases and sales of non-financial assets. If certain criteria are met, entities can hedge eligible components of forecasted spot transactions, forward transactions, or specific pricing elements included in a contract.

(d) Net written options as hedging instruments

The update removes the requirement to perform the “net written option” test when a compound derivative which is made up of a swap combined with a written option is used as the hedging instrument in a cash flow hedge or a fair value hedge of interest rate risk.

(e) Foreign currency denominated debt instrument as hedging instrument and hedged item

Through this accounting standard update, FASB removes the recognition and presentation mismatch that occurs in a dual hedge strategy. Under this strategy, the same foreign currency debt is used both as the hedging instrument in a net investment hedge and as the hedged item in a fair value hedge of interest rate risk.

Effective Date

For public companies, the amendments in this Update must be applied to annual periods starting on or after 15th December 2026, including interim periods within those years. For all other entities, the amendments apply to annual periods beginning on or after 15th December 2027, as well as the interim periods within those years.

Source – Financial Accounting Standard Board

2. IASB Introduces a Proposed Accounting Framework for Managing Interest Rate Risk

The International Accounting Standard Board (IASB) has proposed an accounting model to assist the financial institutions in managing their interest risk throughout their portfolios. Through this model, IASB aims to provide greater transparency into how interest rate risk management affects financial performance and future cash flows in a dynamic environment.

To integrate the aforesaid model, IASB shall be required to make amendment in IFRS 9, Financial Instruments, and IFRS 7, Financial Instruments: Disclosures.

Under IFRS 9, IASB proposes to include chapter 7, with a heading “Risk Mitigation Accounting”. This chapter discusses about the objective and scope of risk mitigation accounting, net re-pricing risk exposure, designated derivatives, application of risk mitigation accounting, and discontinuation of risk mitigation accounting.

Under IFRS 7, the IASB has introduced specific disclosure requirements that entities must follow when applying the risk mitigation accounting model outlined in Chapter 7 of IFRS 9.

Source – International Financial Reporting Standard

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