End of the transitional provision

In December 2025, the IASB published the Exposure Draft Risk Mitigation Accounting, which introduces new requirements for depicting interest rate risk management on a portfolio basis under IFRS 9. When IFRS 9 was first issued, the IASB deliberately excluded so‑called macro hedge accounting, which meant that such hedging relationships have so far continued to be accounted for in accordance with IAS 39 under IFRS 9.6.1.3. The Exposure Draft therefore primarily affects financial institutions and industrial companies that designate corresponding hedging relationships and maintain a sophisticated risk management framework as defined by the standard.

Until IFRS 9 is finalized, companies have been permitted to continue designating and accounting for all types of hedging relationships under IAS 39. With the publication of the Exposure Draft, however, the end of this transitional provision is now in sight. Once IFRS 9 is finalized, IAS 39 will be fully withdrawn. Organizations that still apply hedge accounting under IAS 39 must now begin assessing potential adjustments and transition effects.

To understand the significance and opportunities associated with the upcoming changeover, it is helpful to look at the key changes in hedge accounting introduced by IFRS 9.¹ This article provides an overview of the differences between the hedge accounting requirements under IAS 39 and IFRS 9.

IFRS 9 fundamentally revises the concept of hedge effectiveness. The rigid quantitative boundaries of 80–125 percent under IAS 39 (the “bright‑line test”) – and the extensive calculation effort that came with them – were long viewed as impractical and arbitrary. IFRS 9 removes these thresholds entirely and requires only a prospective assessment of effectiveness. This assessment is demonstrated by showing an economic relationship between the hedged item and the hedging instrument, and by ensuring that credit risk does not outweigh and offset the opposing value changes of both items. In addition, the hedge ratio applied must reflect the actual quantities of the hedged risk and the hedging instrument in place. This more qualitative approach significantly reduces the risk of forced discontinuation of hedge relationships and simplifies practical application. Strategies such as proxy hedges or late designation particularly benefit from the increased flexibility.

With this, IFRS 9 strengthens the alignment with real‑world risk management practices and removes key obstacles that had previously made the application of hedge accounting under IAS 39 more difficult. 

With respect to demonstrating sufficient hedge effectiveness, IFRS 9 does not prescribe a specific method. It requires, however, that the chosen approach adequately captures the characteristics of the hedging relationship as well as all potential sources of ineffectiveness. Organizations should therefore carefully consider the nature and strength of the economic relationship that must be assessed on an ongoing basis. If an assessment using the critical terms match method is possible – meaning a purely qualitative comparison of the valuation‑relevant parameters of both items – little to no ineffectiveness is expected.

If a qualitative assessment is not sufficient, the relationship must be supported quantitatively, for example through a correlation analysis. The standard does not define fixed thresholds for the compensating effect or the required level of correlation. Organizations must set their own criteria and apply them consistently. These criteria may be defined in different ways but must align with the information used in internal risk‑management processes. IFRS 9 further limits interpretative flexibility by requiring that, at the time of designation, the hedge ratio is not expected to generate ineffectiveness.

Because credit risk is not a separately identifiable and measurable risk component, it cannot be explicitly excluded as part of the designation. It is therefore an integral component of the hedging relationship. As a result, organizations must demonstrate that offsetting value changes between the hedged item and the hedging instrument actually exist and are not nullified by default risk. For the hedging instrument, prospective evidence that credit risk plays a subordinate role can often be provided qualitatively, for example by referring to risk‑management policies, established limits and transactions executed with core banks of strong credit quality. The extent to which the hedged items themselves are exposed to credit risk must be assessed on a case‑by‑case basis. 

However, credit risk must be considered in an IFRS‑compliant fair‑value measurement and, consequently, in the quantitative calculation of retrospective ineffectiveness, which remains necessary. The requirements relating to credit risk are complex, involve computational effort and may result in ineffectiveness that must be recognized in the financial statements, even where the underlying terms of the hedged items and hedging instruments otherwise align.

IFRS 9 significantly simplifies the application of the critical terms match method. Under IAS 39, a complete match of all valuation‑relevant parameters between the hedged item and the hedging instrument was required. Under IFRS 9, however, a high degree of alignment (“closely aligned”) is sufficient. In these cases, it may be worthwhile to assess whether a change in method is possible and beneficial when transitioning from IAS 39 to IFRS 9 hedge accounting. It is important to ensure methodological consistency thereafter.

For practice, this results in a substantial efficiency gain: the effectiveness assessment can more often be performed qualitatively without relying on complex quantitative techniques. This is particularly relevant where technical deviations exist, such as imperfect alignment of maturities or minor differences in the underlying.

Despite these simplifications, application remains demanding. IFRS 9 does not provide an exhaustive definition of either the “critical terms” or the concept of “closely aligned.” Organizations must therefore determine which parameters are valuation‑relevant and how the required degree of alignment is to be defined. This provides greater flexibility and efficiency but also requires clear internal policies to ensure consistent application.

Because IAS 39 prohibited the designation of individual risks or risk components (with the exception of foreign currency risk), non‑financial hedged items such as commodity supply contracts could only be designated for the full commodity price risk. A separate designation of the pure commodity price risk was not permitted (IAS 39.82). As a result, differences in the parameters of the hedged item and the hedging instrument (for example freight or storage costs) directly affected the effectiveness measurement of these hedge relationships. IFRS 9 now permits the designation of individual risk components of non‑financial items (IFRS 9.6.3.7(a)), provided these components are separately identifiable and reliably measurable. Whether these criteria are met must be assessed and demonstrated on a case‑by‑case basis, considering market structure and the specific facts and circumstances.

In addition, the previous requirement for portfolio homogeneity has been removed. Under IFRS 9, it is permissible to designate a net position within a portfolio as the hedged item, even when the individual transactions exhibit offsetting risk characteristics. In practice, this is often relevant for hedging strategies involving commodity price risks, which benefit from simplified accounting treatment and reduced effort for homogeneity testing. A prerequisite, however, is a closed portfolio that is managed in line with the defined risk‑management objective. For dynamic portfolios, the Exposure Draft on Risk Mitigation Accounting under IFRS 9 proposes that interest rate risk be managed based on the open risk position, mirroring actual risk‑management practices. Given the extensive requirements for risk management, this accounting model is primarily relevant for banks.

Overall, the changes regarding the designation of risk components and net positions provide organizations with greater flexibility in defining eligible hedged items.

IFRS 9, for the first time, allows non‑designated value components of hedging instruments to be recognized as “costs of hedging” without immediately affecting profit or loss. Application is, however, limited to the time value of options, the forward element of forward contracts and foreign‑currency basis spreads. These components are initially recorded in equity and subsequently reclassified to profit or loss – or to the acquisition cost of a non‑financial item – in line with the hedged item. 

In practice, this results in a more faithful representation of hedging strategies and avoids the undesirable profit‑and‑loss volatility that often occurred under IAS 39. Implementation, however, is complex. It must be assessed whether the non‑designated component fully or only partially qualifies as a cost of hedging. This requires an actual‑aligned comparison with a hypothetical hedging instrument. In addition, IFRS 9 differentiates between transaction‑based and period‑based reclassification, creating additional calculation and documentation requirements.

The transition from IAS 39 to IFRS 9 brings numerous changes to the accounting treatment of hedging relationships. The more flexible requirements for demonstrating effectiveness, the simplified use of the critical‑terms‑match method, the ability to designate individual risk components and the introduction of the cost‑of‑hedging approach all create a much closer alignment with actual risk‑management practices. At the same time, implementing these often highly detailed requirements is more complex than under IAS 39.

With the full withdrawal of IAS 39 now foreseeable, organizations should promptly carry out an impact assessment to understand which processes, hedging strategies and systems will be affected by the mandatory application of IFRS 9. This also offers an opportunity to identify potential areas for optimization, taking cost‑benefit considerations into account.

Our Finance and Treasury Management team is available to support you in addressing these questions and is happy to engage in practical discussions and further exchange.

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1 For more information on the changes described below, see also Prokop/Wallis, KoR 2021; Thomas, KoR 2015 as well as IDW RS HFA 48.