As we covered here, the IASB has issued Risk Mitigation Accounting, an exposure draft of proposed amendments to IFRS 9 and IFRS 7, open for comment until November 30, 2026 (extended from the original date).

The premise underlying the exposure draft is this:

• If entities do not apply risk mitigation accounting, the use of derivatives to mitigate repricing risk often results in an accounting mismatch in profit or loss. This mismatch arises from differences in the timing of when an entity recognizes in profit or loss the repricing effects arising from its underlying portfolios, compared to the gains or losses on the derivatives. Applying risk mitigation accounting, an entity defers the recognition of the gains or losses on designated derivatives in profit or loss to the same period during which the repricing differences arising from the financial instruments in the underlying portfolios affect profit or loss.

In overview, the model (application of which would be voluntary) requires a entity:

• to plan (‘formally document’) how it will apply risk mitigation accounting;
• to identify the underlying portfolios that expose the company to repricing risk;
• to determine the net repricing risk exposure by allocating the underlying portfolios into repricing time bands based on expected repricing dates;
• to mitigate the risk using designated derivatives;
• to specify the risk mitigation objective;
• to construct benchmark derivatives to replicate the timing and amount of repricing risk specified in the risk mitigation objective; and
• to measure and recognize risk mitigation adjustments by comparing the fair value changes in the designated derivatives with those in the benchmark derivatives

Such a complex proposal was probably never going to have a completely easy ride, and based some of the initial feedback, it doesn’t seem that it will. While much of that feedback was broadly positive, the negative commentary tended to be more detailed, seemingly based in greater specific analysis and application to operating realities. This is from the European CFO Network:

• (the proposal) increasingly reflects an accounting model in which outcomes are driven by accounting mechanics and model constructs rather than by the substance of the underlying risk management activities. The cumulative effect of these requirements creates operational complexity and consequently increased operational risk and significant costs and may generate profit or loss volatility that is disconnected from the economic effect of risk mitigation activities. We encourage the IASB to retain a principles-based model that is assessed by reference to whether it faithfully represents risk management activities and the economic effect of those activities in the financial statements.

From HSBC:

• As currently designed, the model introduces extraordinary operational complexity and significant management judgement, and it risks producing volatility in earnings (and potentially capital) that will be difficult to explain to financial statement users. Contrary to RMA’s stated objectives, it is not aligned with common risk management practices, creating a risk that accounting constraints drive risk management behaviour rather than reflect it. More fundamentally, aspects of the model appear to require a level of attribution and tracking that is difficult to reconcile with net risk management of dynamic portfolios; in our view this misalignment limits the model’s suitability for reflecting how IRRBB (Interest Rate Risk in the Banking Book) is managed in practice and contributes to artificial volatility. The disclosure package also risks imposing a double burden in the common scenario of partial adoption: entities would need to provide qualitative explanations as to why eligible portfolios are not accounted for under RMA, while also providing detailed disclosures for portfolios that do apply RMA, including information that may be commercially sensitive. This is unlikely to provide additional insight over existing disclosures. Furthermore, the disclosures are not aligned with prudential IRRBB reporting, weakening read-across and comparability.

The HSBC submission, by the way, seems like a superior example of what the IASB might hope for in a comment letter: clearly written (at least given the complexity of the subject matter), setting out its observations in detail, based on what seems to have been fairly extensive fieldwork, and offering constructive solutions and alternatives (“To the extent this letter does not offer specific improvements or solutions, that reflects our assessment that the challenges with RMA as currently drafted are fundamental and would require a redesign of the model rather than targeted drafting refinements. It does not reflect a lack of willingness on our part to engage in solutions.”)

Anyway, I conceded last time that I’m not at all capable of analyzing the specific merits of this proposal. The basis of conclusions cites the originating premise that “users of financial statements need a better understanding of entities’ repricing risk management activities,” but as a practical matter, that “need,” if it meaningfully exists, can’t be very urgent or damaging given for how long it’s gone unfulfilled. One admires the IASB’s perseverance – the project has been ongoing, in various forms, for well over ten years – but one suspects it will be tunneling a while longer yet before reaching the light…

The opinions expressed are solely those of the author.