IASB Proposes Risk Mitigation Accounting Changes | ASB Invites Comments

1. Introduction

Indian Accounting Standards (Ind AS) are largely converged with the IFRS Standards issued by the International Accounting Standards Board (IASB) of the IFRS Foundation. To ensure transparency and global participation in its standard setting process, the IASB follows a rigorous due process, which includes issuing consultative documents such as exposure drafts and inviting public comments from stakeholders worldwide.

The Accounting Standards Board (ASB) of the Institute of Chartered Accountants of India (ICAI) actively encourages its stakeholders to participate in this process. By inviting comments on IASB consultative documents, the ASB provides an opportunity to identify practical challenges, industry-specific concerns and implementation issues at an early stage.

2. Exposure Draft on Risk Mitigation Accounting Including Proposed Amendments to IFRS 9 and IFRS 7

The exposure draft issued by IASB has proposed amendment to IFRS 9, Financial Instruments and IFRS 7, Financial Instruments: Disclosures. Under the said exposure draft, the IASB focuses on addressing challenges faced by entities, particularly financial institutions, in accounting for re-pricing risk (such as interest rate risk) when it is managed on a net basis rather than on an individual instrument basis. Further, it is also requiring companies to disclose its strategy for managing re-pricing risk and the effects of its risk management activities.

2.1 Condition for Application of Risk Mitigation Accounting

To 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:

• the entity’s business activities give rise to the recognition and de-recognition of financial instruments that expose it to re-pricing risk
• the entity’s risk management strategy specifies risk limits within which re-pricing risk, based on a mitigated rate, is to be mitigated
• the entity mitigates re-pricing risk arising from underlying portfolios on a net basis using derivatives in accordance with its risk management strategy.

2.2 Disclosures to Be Made in Respect of Risk Mitigation Accounting

The proposed amendments emphasise the importance of transparent and decision-useful disclosures in respect of risk mitigation accounting. These disclosures are intended to enable users of financial statements to understand an entity’s strategy for managing re-pricing risk, the rationale for applying risk mitigation accounting, and the effects of such risk management activities on the entity’s financial position and performance.An entity shall disclose following information regarding risk mitigation accounting separately from other line items:

(a) the risk mitigation adjustment recognised either as part of the entity’s assets (when it has a debit balance) or as part of its liabilities (when it has a credit balance) in the statement of financial position

(b) the amount of the risk mitigation adjustment recognised in profit or loss during the reporting period in the statement of comprehensive income.

3. Why This Matters for Indian Stakeholders?

Although the proposals are currently at the IFRS level, they are highly relevant for Indian entities, especially banks, NBFCs and other financial institutions, given the close alignment between Ind AS and IFRS. Early awareness and participation will help stakeholders in following aspects:

(a) anticipate potential future amendments to Ind AS

(b) assess system, process and data implications;

(c) provide India-specific feedback based on local market practices and regulatory environment.

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