Banks do not normally manage interest rate risk one loan at a time.
They manage portfolios.
Thousands of mortgages, deposits, loans and other financial instruments may reprice at different times. Some balances disappear early. New business enters the portfolio. Customer behaviour changes. Interest rates move.
The risk management process is dynamic.
The accounting has never fitted that reality particularly comfortably.
That is why some companies have continued using parts of IAS 39 Financial Instruments: Recognition and Measurement long after IFRS 9 replaced most of the old standard.
The International Accounting Standards Board is now proposing a new Risk Mitigation Accounting model designed specifically for companies that manage repricing risk on a net basis.
For ACCA SBR candidates, this is a strong current issues topic because it is not simply about learning another hedge accounting method. It is about understanding why existing accounting can fail to reflect how risk is actually managed.
Candidates developing this kind of analysis with an ACCA SBR tutor should focus first on that commercial problem.
The accounting problem begins with portfolios
Imagine a bank with a large mortgage portfolio.
Some customers pay fixed rates.
Others have variable rates.
Deposits may reprice at different times from loans.
Customers may repay mortgages early.
New lending is constantly added.
The bank does not necessarily hedge each individual mortgage with a separate derivative.
Instead, it looks at the overall repricing exposure.
Management might decide that too much of the portfolio will reprice within a particular period and use interest rate derivatives to reduce that net exposure.
Economically, that makes sense.
Traditional hedge accounting becomes more difficult because it is largely built around identifying specific hedged items and specific hedging instruments.
The risk management strategy may operate at portfolio level while the accounting tries to break the portfolio into more static relationships.
That creates friction.
What repricing risk actually means
Repricing risk is a type of interest rate risk.
It arises because financial assets and liabilities do not all reset to current interest rates at the same time or in the same amounts.
Suppose a bank has £1 billion of fixed-rate mortgages earning 4 per cent for several years.
It funds some of those mortgages using deposits whose interest rates can change much more quickly.
If market rates rise, the cost of funding may increase while the mortgage income remains fixed.
The bank’s margin can be squeezed.
The reverse can also happen.
This timing mismatch is a genuine economic risk.
Banks therefore monitor when assets and liabilities will reprice and use derivatives to keep the exposure within acceptable limits.
Risk Mitigation Accounting is intended to reflect those activities more faithfully.
Why ordinary hedge accounting struggles
IFRS 9 contains hedge accounting requirements designed to align accounting more closely with risk management.
They work reasonably well in many situations.
However, managing a changing portfolio of interest rate exposure presents additional problems.
The underlying positions move constantly.
Expected prepayments change.
Deposits mature or are replaced.
Customers refinance.
New lending enters the book.
Risk managers therefore adjust their derivatives regularly.
A static hedge relationship can struggle to keep pace with that process.
Companies may be forced to designate and redesignate hedges frequently or use accounting structures that do not match the way management actually thinks about the exposure.
The result can be complexity, operational burden and accounting volatility that does not necessarily reflect the economics of the risk management strategy.
This is why IAS 39 never completely disappeared
When IFRS 9 was introduced, the IASB did not immediately replace every part of IAS 39 hedge accounting.
Companies were permitted in certain circumstances to continue applying IAS 39 hedge accounting requirements.
One important reason was that the Board had not yet completed its work on accounting for dynamic portfolio-level interest rate risk.
That created an unusual situation.
IFRS 9 became the main financial instruments standard, but part of its predecessor remained relevant years later.
The new Risk Mitigation Accounting proposal is intended to provide a route towards resolving that unfinished business.
The IASB is now seeking feedback not only on the new model but also on withdrawing IAS 39 completely.
That makes the project particularly significant.
The new model starts with how risk is managed
One of the most important features of the proposed model is that eligibility depends on the company’s risk management activities rather than simply the industry it operates in.
Banks are the obvious users because they commonly manage large portfolios of interest rate exposure.
However, the model is not being written as “bank accounting”.
A company would need business activities that create repricing risk.
Its risk management strategy would need to establish risk limits based on a mitigated rate.
It would also need to manage repricing risk from underlying portfolios on a net basis using derivatives.
This links the accounting directly to documented risk management activity.
That is important.
The accounting should represent what the organisation genuinely does to manage risk rather than create a structure purely to achieve a preferred reporting result.
The model looks at net repricing exposure
Under the proposed approach, companies identify portfolios of financial instruments that create repricing risk.
Those instruments are allocated to time bands according to expected repricing dates.
Management can then determine the net repricing risk exposure for each period.
This is closer to the way financial institutions commonly manage interest rate risk.
Instead of asking whether one derivative hedges one specific loan, the analysis asks what net exposure exists within the portfolio and how management is mitigating it.
That is a fundamental change in perspective.
The individual instruments still exist and continue to be accounted for under their normal IFRS requirements.
Risk Mitigation Accounting operates alongside that accounting to reflect the effects of managing the portfolio-level exposure.
The derivatives themselves do not disappear
The derivatives used to mitigate the risk continue to be recognised and measured.
The proposed model does not simply remove fair value accounting for derivatives.
The problem it tries to address is the timing mismatch in profit or loss.
A derivative may change in fair value immediately because interest rates change.
The effect of the corresponding repricing risk within the underlying portfolio may emerge through profit or loss over a different period.
Without special accounting, the derivative movement can therefore create volatility before the economic effect being managed appears.
Risk Mitigation Accounting attempts to align those periods more closely.
The risk mitigation adjustment is the key mechanism
The proposed model introduces a risk mitigation adjustment.
A portion of the gains or losses arising on the designated derivatives would be accumulated in this adjustment rather than being recognised immediately in profit or loss.
The amount is based on a comparison between the actual designated derivatives and theoretical benchmark derivatives.
The accumulated amount would then be recognised in profit or loss during the periods in which the repricing differences from the underlying portfolios affect profit or loss.
The objective is timing alignment.
The derivatives still change in value.
The underlying financial instruments still follow their normal measurement requirements.
The adjustment is used to better reflect when the economic effect of the risk mitigation activity should appear in performance.
Benchmark derivatives are theoretical rather than real contracts
Benchmark derivatives are an important part of the proposed model.
They are not actual derivatives purchased from another party.
They are theoretical instruments constructed to represent the timing and amount of repricing risk that management intends to mitigate.
They effectively provide a measurement reference.
The company compares the fair value changes in its actual designated derivatives with the fair value changes in these benchmark derivatives.
The risk mitigation adjustment is then measured using a lower-of approach.
This is designed to prevent the accounting from deferring more derivative gains or losses than can be supported by the repricing risk actually being mitigated.
For SBR candidates, the principle matters more than memorising detailed mechanics.
The benchmark derivative represents the targeted risk.
The real derivative represents what management actually used.
The accounting compares the two.
Unexpected changes still need to be captured
Portfolio risk changes constantly.
A bank may expect customers to retain mortgages for a certain period.
Then interest rates fall and large numbers refinance early.
Deposits may behave differently from previous expectations.
Economic conditions may change customer behaviour.
The model therefore needs to respond when the underlying portfolio changes unexpectedly.
The proposed requirements would require benchmark derivatives to be adjusted where unexpected developments reduce or otherwise change the net repricing risk exposure.
This matters because the accounting should not continue reflecting a risk position that no longer exists.
The model is designed to be dynamic for the same reason the underlying risk management is dynamic.
There is still a safeguard against excessive deferral
The IASB has also proposed an assessment where there is an indication that the accumulated risk mitigation adjustment may no longer be fully realisable.
Management would compare the adjustment with the present value of the remaining net repricing risk exposure.
If the accumulated adjustment exceeds the amount that can still be supported, the excess would be recognised immediately in profit or loss.
This acts as a reasonableness check.
The model should reflect genuine risk mitigation.
It should not become a mechanism for storing derivative losses on the balance sheet after the underlying economic exposure has disappeared.
That safeguard would be important for investors and auditors.
Accounting should follow risk management without becoming optional smoothing
There is always a danger when hedge accounting reduces volatility that the result is described as smoothing earnings.
That is not the objective.
Good hedge accounting should remove accounting mismatches created when economically connected items are measured or recognised differently.
It should not hide genuine economic losses.
The proposed Risk Mitigation Accounting model therefore depends heavily on documented strategy, measurable exposure and derivatives actually used to implement that strategy.
Management cannot simply identify an inconvenient loss and decide that it relates to risk mitigation.
The process needs to begin with genuine risk management activities.
That distinction is essential in an SBR answer.
Discontinuation is deliberately restricted
Another interesting feature of the proposal is how companies would stop using the model.
If a company elects to apply Risk Mitigation Accounting, it would generally continue unless its risk management strategy changes.
Day-to-day changes in the portfolio would not automatically trigger discontinuation.
That makes sense because dynamic portfolios constantly change.
Loans mature.
Customers repay.
New business appears.
Derivatives are replaced.
Those events reflect the normal operation of portfolio risk management.
A genuine change in strategy is different.
For example, the company may alter the risk measure it uses, change its mitigated rate or significantly change the time horizon over which it manages repricing risk.
The proposed accounting distinguishes between changing exposure and changing strategy.
Disclosure becomes more important not less
A sophisticated accounting model is only useful if investors can understand what it is doing.
The IASB is therefore proposing additional IFRS 7 disclosures.
Companies would need to explain their repricing risk management strategy, how their activities may affect the amount, timing and uncertainty of future cash flows, and how Risk Mitigation Accounting affects the financial statements.
The proposal would also require information from eligible companies that choose not to use the model.
That is significant.
Investors should still understand how those businesses manage repricing risk even if management decides not to apply the specialised accounting.
This reinforces a wider reporting principle.
Recognition and measurement alone rarely tell the complete story.
The proposal could finally remove IAS 39
Perhaps the most symbolically important part of the project is the proposed withdrawal of IAS 39.
IFRS 9 was issued years ago, yet IAS 39 has remained alive partly because of the unfinished work around portfolio interest rate risk.
Risk Mitigation Accounting could finally provide the replacement necessary to remove that remaining fallback.
However, this is not final.
The IASB is actively asking companies that still use IAS 39 hedge accounting to respond to the consultation.
That feedback matters because withdrawing IAS 39 could affect businesses that do not intend to use the new model.
The Board needs to understand those consequences before making its final decision.
Candidates should therefore be careful with wording.
IAS 39 has not yet been withdrawn.
The IASB is proposing its withdrawal.
The consultation is still live
The Exposure Draft remains open for comment until 30 November 2026.
Companies are also undertaking fieldwork using their own portfolios and risk management processes.
That fieldwork is particularly important because the proposed model is operationally complex.
Something can work perfectly in an illustrative example and still create serious problems when applied to a bank containing millions of financial instruments.
The IASB wants evidence about whether the model works in practice, whether more guidance is needed and whether it genuinely improves the information provided to investors.
That makes this a true current issue rather than settled accounting.
How this could appear in an SBR question
Imagine a banking group manages interest rate risk across a portfolio of fixed-rate mortgages and customer deposits.
Management uses interest rate swaps to keep its net exposure within board-approved limits.
The CFO complains that movements in the derivatives create profit volatility even though the swaps are economically reducing the group’s repricing risk.
An SBR requirement could ask candidates to discuss the proposed Risk Mitigation Accounting model and advise the board.
A weak answer would describe interest rate swaps.
A stronger answer would identify the accounting mismatch.
The bank manages repricing risk dynamically on a net portfolio basis, while existing hedge accounting may not fully reflect that risk management activity.
The candidate could then explain the proposed portfolio approach, benchmark derivatives, risk mitigation adjustment and improved disclosures.
The conclusion should make clear that the proposal is not yet mandatory.
That gives the board useful advice rather than a technical lecture.
Professional scepticism still matters
A new model does not remove management judgement.
Expected repricing dates matter.
Customer behaviour matters.
Portfolio composition matters.
Risk limits matter.
The derivatives selected by management matter.
Forecasts about prepayments and deposit behaviour may influence the reported exposure.
Those estimates create opportunities for bias.
The audit committee and external auditor therefore need to understand whether assumptions reflect observable behaviour and whether changes in assumptions genuinely result from new information.
Risk Mitigation Accounting may better align accounting with risk management.
That does not mean management should be allowed to define the risk however it wishes.
Governance remains essential.
What candidates should remember
There is no need to memorise every calculation in the Exposure Draft.
Understand the story.
A company manages repricing risk across changing portfolios.
Existing hedge accounting struggles to reflect that dynamic net risk management.
The IASB proposes a new model based on underlying portfolios, net repricing risk exposure, designated derivatives, benchmark derivatives and a risk mitigation adjustment.
The adjustment is intended to align derivative gains and losses with the periods in which the repricing effects from the underlying portfolios affect profit or loss.
The model would also bring enhanced disclosures.
And, if the wider proposal proceeds, it could finally allow IAS 39 to be withdrawn.
Candidates using an ACCA SBR course should learn that logic first and add technical detail only where a requirement needs it.
What to do next
Risk Mitigation Accounting is a good example of why current issues matter in SBR.
The problem began in practice.
Banks manage interest rate risk dynamically across portfolios.
The existing accounting did not always reflect that activity well.
Standard setting is now trying to close the gap.
That makes the topic bigger than hedge accounting mechanics.
It is about faithful representation.
It is about whether financial statements show investors what risk management is actually achieving.
And it is about whether accounting can finally move beyond an IAS 39 workaround that has survived far longer than originally expected.
