IASB proposes accounting model for interest rate risks

The International Accounting Standards Board proposed a new accounting model to reflect how banks and other financial institutions manage interest rate risks in their portfolios.

The proposed Risk Mitigation Accounting model comes in response to feedback from financial institutions and investors that the current hedge accounting requirements don't adequately reflect how interest rate risk is managed in practice. The newly proposed accounting model aims to offer more transparency into how interest rate risk management impacts financial performance and future cash flows in a dynamic environment.

"Our proposed Risk Mitigation Accounting model aims to bring accounting and risk management closer together to enhance internal efficiency and strengthen communication between financial institutions and their stakeholders," said IASB chair Andreas Barckow in a statement Wednesday.

In the proposal, the IASB noted that many entities take a dynamic approach to managing the repricing risk arising from open portfolios of financial instruments, known as "dynamic risk management." However, they have long faced challenges in faithfully representing the economic effects of such dynamic, complex risk management activities in financial statements in a way that provides useful information to users of financial statements.

To develop the new accounting model and improve companies' disclosures about their interest-rate risk management activities, the IASB is proposing amendments to IFRS 9 Financial Instruments and IFRS 7 Financial Instruments: Disclosures. The IASB is also looking for comments on its proposal to withdraw IAS 39 Financial Instruments: Recognition and Measurement. The consultation on the new Risk Mitigation Accounting model is open for comment until July 31, 2026. The 240-day consultation period also includes fieldwork, so financial institutions and other interested parties can test the model using their own data and give practical feedback to the IASB.