Why Hedge Accounting Is Evolving and Why That Matters Strategically

For many professionals outside Treasury, ALM, and Finance, hedge accounting is often perceived as a highly technical accounting discipline associated with derivatives and financial statements. In practice, however, its role inside financial institutions is closely connected to how balance sheet exposures and hedging strategies are represented in accounting terms, particularly through their impact on profit and loss volatility.

This article explores how the IASB’s proposed Risk Mitigation Accounting (RMA) framework reflects a broader evolution toward portfolio-based balance sheet management and more integrated Treasury, ALM and Finance practices. 

Audio Article

Existing hedge accounting frameworks were developed to reduce the accounting volatility that can arise when derivatives used for hedging purposes are measured differently from the balance sheet exposures they are intended to protect. In practice, banks manage interest rate and balance sheet risk using derivatives, while many underlying assets and liabilities are accounted for under different valuation approaches. Without hedge accounting treatment, this mismatch can generate volatility in financial statements, particularly in profit and loss, even when the economic objective of the hedge is risk reduction.

The IASB’s proposed RMA model illustrates this clearly. The discussion goes beyond hedge documentation mechanics or accounting treatment alone. At the center of the proposal is a wider attempt to represent how institutions actually manage interest rate risk across portfolios and balance sheet structures that evolve continuously over time.

Why Hedge Accounting Exists 

Hedge accounting was developed to address a structural mismatch between economic risk management and financial reporting.

Banks and financial institutions account for assets, liabilities, and derivatives under different accounting treatments. In balance sheet management, derivatives are often used to hedge interest rate or other market exposures, but the derivative itself may still be measured at fair value through profit and loss while the underlying exposure is accounted for differently. This can generate volatility in financial statements even when the hedge is economically reducing risk.

As market conditions change, derivatives can generate accounting gains or losses even when they are offsetting underlying balance sheet exposures effectively. A bank may become economically more protected while simultaneously reporting greater earnings volatility.

Hedge accounting frameworks were introduced to reduce this disconnect by allowing qualifying hedging relationships to receive different accounting treatment. Depending on the hedge type, part of the hedge impact may be temporarily recognized in equity (OCI) rather than immediately in profit and loss, helping align the timing of accounting outcomes with the economic purpose of the hedge.

For financial institutions, this distinction is highly relevant because accounting volatility influences reported earnings, capital impacts, management decisions, and market perception. The accounting treatment of hedging activity can materially affect how financial performance is presented externally, even when underlying risk exposures remain largely unchanged.

The Limitations of Traditional Hedge Accounting Frameworks

Existing hedge accounting frameworks under IAS 39 and IFRS 9 were designed around relatively static and highly specific hedging relationships.

Traditional hedge accounting generally links particular hedging instruments to specific exposures or portfolios. While this approach works reasonably well for stable positions, it becomes more difficult to apply in modern balance sheet environments where exposures evolve continuously over time.

Treasury and ALM teams manage interest rate risk dynamically across loans, deposits, funding structures and expected future cash flows. Decisions are usually taken at the portfolio level rather than instrument by instrument. 

Current frameworks do not always represent that operational reality effectively. Several limitations are frequently highlighted by institutions and industry participants:

• Strong focus on individual hedging relationships rather than net exposures,

• Limited representation of open and evolving portfolios,

• Reliance on proxy hedging structures,

• And accounting outcomes that can diverge from internal risk management views.

As a consequence, institutions often need to structure hedges in ways that satisfy accounting eligibility requirements while also maintaining consistency with Treasury and ALM objectives. In some situations, accounting constraints themselves influence how hedging strategies are implemented operationally.

These limitations are among the main drivers behind the IASB’s proposed Risk Mitigation Accounting framework.

For institutions working to align Treasury, ALM, and Finance within a shared operational model, Mirai ALM & Liquidity provides an integrated platform where IRRBB, liquidity, and capital risks are modeled together. Multiple business units — including Market Risk, Treasury, Audit, and Model Validation — work from shared inputs and market data, reducing the inconsistencies that fragmented systems tend to create across reporting and risk management. 

Risk Mitigation Accounting and Portfolio-Based Risk Management

Risk Mitigation Accounting (RMA) was introduced by the IASB as part of proposed amendments to IFRS 9 to better represent how entities manage interest rate repricing risk in practice.

Unlike traditional hedge accounting frameworks, RMA is designed around portfolio and balance sheet management rather than static instrument-level relationships. The model focuses on net repricing risk exposure across groups of assets, liabilities, and forecast cash flows managed together as part of Treasury and ALM activities, which materially changes the conceptual starting point.

Instead of beginning with a specific hedged item and hedging instrument, the framework starts from the institution’s overall repricing risk position across defined underlying portfolios. These portfolios may include assets, liabilities and forecasted business activity, such as mortgage pipelines or other expected balance sheet positions managed collectively within Treasury and ALM frameworks.

The framework then focuses on the Net Repricing Risk Exposure (NRRE), which represents the institution’s net interest rate exposure before derivatives are applied. Treasury functions use derivatives to reduce that exposure in line with internal risk management objectives and ALCO decisions.

Accounting treatment is consequently more closely aligned with the way many institutions already manage balance sheet risk operationally.

The proposal also reflects a broader evolution in accounting philosophy, moving away from frameworks primarily structured around formal instrument-level hedge relationships toward models more closely aligned with portfolio-level risk mitigation and economic exposures.

Why the Proposal Matters for Treasury, ALM, and Finance

The relevance of the RMA discussion extends well beyond accounting technicalities because it sits directly within the ongoing transformation of Treasury and balance sheet management functions.

Financial institutions are operating in an environment characterized by sustained interest rate volatility, evolving liquidity conditions, inflation pressure, and growing regulatory scrutiny. In this context, balance sheet management is now closely connected to profitability, resilience, and strategic planning.

Treasury and ALM teams require frameworks capable of supporting dynamic risk management while maintaining consistency across financial reporting.

When accounting treatment does not adequately reflect underlying risk management activity, institutions may face additional volatility in reported results, operational inefficiencies or greater complexity in explaining outcomes internally and externally. 

The proposed RMA framework attempts to better align accounting outcomes with underlying risk management, rather than eliminating volatility, by reflecting the timing and nature of risk mitigation more consistently.

The proposal also remains under consultation and fieldwork testing. The IASB consultation process currently runs until November 2026, with institutions expected to test the framework using real balance sheet and ALM data to evaluate operational feasibility, modeling requirements and accounting outcomes. The extended consultation period also reflects the importance of incorporating operational fieldwork findings and industry feedback into the development of the final framework.

The framework may continue to evolve as feedback from banks, auditors, and industry participants is incorporated into the final standard.

The Operational Complexity Behind RMA 

Although the conceptual rationale behind RMA is relatively clear, implementation introduces substantial operational and quantitative complexity.

Institutions need to formalize how Treasury and ALM practices translate into accounting treatment. Existing hedge accounting relationships may need to be reassessed, modified, or discontinued. Underlying portfolios must be defined appropriately, behavioral assumptions modelled consistently and repricing exposures recalculated continuously across reporting periods.

The proposed framework also introduces new measurement and validation mechanics.

Traditional hedge effectiveness testing is replaced by a broader assessment of whether net repricing risk is mitigated within defined limits over time. This involves constructing benchmark derivatives representing the intended mitigation objective, comparing them with designated market derivatives used by Treasury, recalculating NRRE positions and assessing Risk Mitigation Adjustments on an ongoing basis.

These requirements increase the need for integrated data structures, quantitative modeling capabilities, governance frameworks, and traceable calculations across Treasury, ALM, Risk, and Finance functions.

For many institutions, the implementation challenge extends beyond accounting itself and directly affects operating models, data governance, and the integration between risk management and financial reporting infrastructures.

Platforms such as Mirai ALM & Liquidity are built around full data traceability and a unified balance sheet model that connects Treasury, ALM, Risk, and Finance through consistent inputs. The simulation environment allows teams to test multiple scenarios—including stress conditions—and evaluate their impact across NIM, EVE, and liquidity metrics within the same analytical environment, supporting the kind of multi-period, multi-assumption work that RMA fieldwork exercises require. 

How Mirai Supports the Transition Toward RMA

As institutions prepare for the possible introduction of Risk Mitigation Accounting, implementation capabilities and technology infrastructure are playing a more important role.

Mirai combines ALM and balance sheet risk management expertise with IFRS and regulatory knowledge to support institutions in translating Treasury and risk management practices into operational and auditable accounting frameworks.

Our platform is built around an integrated balance sheet management approach that connects Treasury, ALM, Risk and Finance functions through a unified data model. This includes areas such as IRRBB, liquidity, FTP, CSRBB and regulatory reporting within a consistent and traceable framework.

Within the context of RMA, these capabilities become particularly relevant because the framework requires institutions to:

• Define and manage underlying portfolios, 

• Calculate NRRE positions, 

• Construct benchmark and designated derivatives, 

• Perform multi-period scenario testing, 

• And maintain governance and auditability across evolving balance sheet exposures.

The IASB has also encouraged institutions managing repricing risk on a net basis to conduct fieldwork during the consultation period using real balance sheet and ALM data. This includes assessing operational requirements, modeling assumptions, and the robustness of the proposed Risk Mitigation Adjustment mechanics.

Mirai supports these exercises by helping institutions structure fieldwork analysis, operationalize calculations, and align accounting implementation with existing Treasury and ALM decision-making processes.

Treasury teams continue to define risk appetite, mitigation objectives, and balance sheet strategy internally. Increasing alignment between accounting frameworks and dynamic balance sheet management also increases the importance of operationalizing those decisions consistently and transparently.

Accounting Frameworks Are Moving Closer to Balance Sheet Reality

The proposed evolution from traditional hedge accounting toward Risk Mitigation Accounting reflects broader changes taking place across financial institutions.

Treasury and ALM functions have progressively adopted more dynamic and portfolio-based approaches to balance sheet management, while accounting frameworks have historically remained more static and relationship-driven. The IASB’s RMA proposal represents an attempt to align accounting treatment more closely with operational risk management practices.

The consultation and fieldwork process remains ongoing, and the final framework may continue to evolve before implementation. Nevertheless, the proposal already indicates a growing regulatory focus on accounting models capable of representing balance sheet risk management in a more integrated and economically consistent manner.

The discussion goes beyond accounting treatment alone because it directly affects how Treasury, Risk, Finance, and ALM functions work together to model exposures, manage balance sheet risk, and represent financial performance externally. 

See how Mirai supports RMA implementation and balance sheet integration.

Book a demo to explore how Mirai connects Treasury, ALM, Risk, and Finance within a single auditable environment, and how it supports the fieldwork exercises the IASB is encouraging institutions to conduct during the consultation period.

F&Q: Hedge Accounting and Risk Mitigation Accounting

• What is Risk Mitigation Accounting (RMA)?

  RMA is an IFRS 9 amendment proposed by the IASB to better reflect how banks manage interest rate repricing risk across portfolios. Unlike traditional hedge accounting, it starts from the institution's net repricing exposure rather than individual hedging relationships.

• How does RMA differ from existing hedge accounting under IFRS 9?

  Currently, the IFRS 9 framework links specific instruments to specific exposures. RMA is structured around portfolio-level net repricing risk, which aligns more closely with how Treasury and ALM functions operate in practice.

• What is the Net Repricing Risk Exposure (NRRE)?

  The NRRE is the institution's net interest rate exposure across defined portfolios before derivatives are applied. It is the central measurement concept in the proposed RMA framework.

• What are the operational challenges of implementing RMA?

  Implementation requires formalizing how Treasury and ALM practices translate into accounting treatments, defining underlying portfolios, modeling behavioral assumptions, continuously recalculating NRRE positions, and maintaining auditability across functions.

• When will the IASB finalize the RMA framework?

  The IASB consultation runs until November 2026, with institutions expected to conduct fieldwork using real balance sheet and ALM data. The final framework may continue to evolve based on industry feedback.

• Why does hedge accounting matter for reported earnings?

  Without hedge accounting treatment, derivatives used to reduce economic risk can generate accounting gains or losses that flow directly through profit and loss — creating earnings volatility even when the underlying balance sheet position is stable.