How does IFRS 9 hedge accounting differ from IAS 39?

IFRS 9 replaced the more rules-based hedge accounting model under IAS 39 with a principles-based framework designed to create a closer link between risk management strategy, the rationale for hedging and the resulting accounting treatment. Key changes include the removal of the IAS 39 80–125% effectiveness threshold, broader eligibility for certain hedged items and hedging instruments, and the introduction of rebalancing.

For banks, the differences are particularly relevant because hedging is closely connected with Treasury, Asset and Liability Management (ALM), interest rate risk management and the management of derivatives across the balance sheet.

What changed in hedge accounting when IFRS 9 replaced IAS 39?

IFRS 9 introduced a hedge accounting model designed to align accounting more closely with how an entity manages financial risks.

One of the most significant changes was the removal of the strict 80–125% effectiveness threshold used under IAS 39. IFRS 9 instead applies effectiveness requirements based on the economic relationship between the hedged item and hedging instrument, the effect of credit risk and the hedge ratio used for risk management.

Key changes introduced by IFRS 9 include:

• Removal of the 80–125% effectiveness threshold: IFRS 9 uses a principles-based, prospective assessment rather than requiring a hedge to remain within a predefined numerical range.
• Broader eligibility: IFRS 9 expanded the possibilities for designating risk components, groups of items and aggregated exposures as hedged items.
• Rebalancing: A hedge ratio can be adjusted in certain circumstances without automatically discontinuing the hedging relationship.
• Cost of hedging: IFRS 9 introduced specific accounting treatment for components such as the time value of options and the forward element of forward contracts when they are excluded from the designated hedging relationship.
• Stronger connection to risk management: The designation and documentation of a hedging relationship are linked directly to the entity’s documented risk management objective and strategy.

The three main types of hedge relationships remain: fair value hedges, cash flow hedges and hedges of a net investment in a foreign operation. What changed significantly is how relationships qualify for and continue to meet hedge accounting requirements.

How does hedge effectiveness testing differ under IFRS 9?

Under IFRS 9, hedge effectiveness is assessed prospectively using a principles-based approach rather than the IAS 39 80–125% quantitative effectiveness threshold.

The assessment can be qualitative or quantitative depending on the characteristics and complexity of the hedging relationship.

IFRS 9 requires three key effectiveness conditions to be met:

1. Economic relationship

There must be an economic relationship between the hedged item and the hedging instrument. Their values should generally move in response to the same underlying risk in a way that results in an offsetting effect.

2. Credit risk does not dominate

Changes resulting from credit risk must not dominate the value changes resulting from the economic relationship between the hedged item and hedging instrument.

3. Appropriate hedge ratio

The hedge ratio used for accounting purposes should reflect the quantities of the hedged item and hedging instrument that the entity actually uses for risk management.

Together, these requirements replace the IAS 39 bright-line effectiveness test with an approach more closely linked to the economics of the hedging relationship.

It is also important to distinguish hedge effectiveness testing from hedge accounting.

Hedge effectiveness testing assesses whether a designated hedging relationship meets the relevant effectiveness requirements and supports the measurement of hedge ineffectiveness. Hedge accounting determines how changes in the hedging instrument and hedged item are recognised and presented in the financial statements.

How does rebalancing work under IFRS 9?

Rebalancing is an important difference between IFRS 9 and IAS 39.

If the hedge ratio no longer meets the IFRS 9 effectiveness requirements but the bank’s underlying risk management objective remains unchanged, the bank may be able to adjust the designated quantities of the hedged item or hedging instrument to restore an appropriate hedge ratio.

This can allow the existing hedging relationship to continue rather than requiring it to be discontinued solely because the relationship no longer produces the original degree of offset.

Rebalancing does not mean changing a hedge ratio simply to achieve a preferred accounting outcome. It is intended to reflect changes in the economic relationship while remaining consistent with the underlying risk management activity.

The introduction of rebalancing is one of the ways IFRS 9 seeks to align hedge accounting more closely with actual risk management practice.

What hedging instruments and hedged items are eligible under each standard?

IFRS 9 broadened the eligibility of hedging instruments and hedged items compared with IAS 39.

Eligible hedging instruments

Derivatives measured at fair value through profit or loss continue to be central hedging instruments under IFRS 9. IFRS 9 also expanded the circumstances in which certain non-derivative financial instruments can qualify.

For banks, common hedging instruments include interest rate swaps, cross-currency swaps, forwards and options, subject to the applicable eligibility and designation requirements.

IFRS 9 also introduced its cost of hedging approach. For example, the time value of an option or forward element of a forward contract can in certain circumstances be excluded from the designated relationship and accounted for separately rather than simply contributing to hedge ineffectiveness.

Eligible hedged items

IFRS 9 also broadened what can be designated as a hedged item.

Important changes include:

• Risk components: An eligible separately identifiable and reliably measurable risk component can be designated rather than necessarily designating the entire exposure. For banks, an important example is benchmark interest rate risk.
• Aggregated exposures: Certain combinations of an exposure and a derivative can themselves be designated as hedged items.
• Groups and net positions: IFRS 9 provides greater scope for groups of items and certain net positions to qualify, subject to specific requirements.
• Certain exposures affecting OCI: IFRS 9 provides hedge accounting possibilities for designated equity instruments measured at fair value through other comprehensive income in specified circumstances.

These changes can make it easier to align designated accounting relationships with the way the underlying risk is actually managed.

How do IFRS 9 and IAS 39 differ for macro hedging?

The distinction between IFRS 9 and IAS 39 becomes particularly important for banks managing interest rate risk at portfolio level.

IFRS 9’s general hedge accounting model can be applied to many individual hedging relationships as well as qualifying groups of items and certain net positions. However, it did not introduce a comprehensive accounting model specifically designed for dynamic portfolio interest rate risk management.

This has been particularly relevant to fair value hedges of the interest rate exposure of portfolios of financial assets or financial liabilities, often referred to as fair value macro hedging. The relevant IAS 39 portfolio fair value hedge requirements have continued to play a role for these relationships.

The distinction matters because banks often manage interest rate risk dynamically across portfolios rather than exclusively through one-to-one relationships between individual assets or liabilities and derivatives.

For example, a micro hedging relationship might establish a direct relationship between a particular exposure and an interest rate swap. Macro hedging can instead involve managing interest rate risk across a wider and changing portfolio of exposures.

This is why banks need to distinguish between micro hedge accounting and the accounting treatment of portfolio or macro interest rate risk management.

What is changing with Risk Mitigation Accounting?

The accounting treatment of dynamic interest rate risk management is evolving.

In December 2025, the International Accounting Standards Board published an Exposure Draft proposing a Risk Mitigation Accounting model. The proposals are designed to address the accounting for dynamic interest rate risk management and ultimately affect the remaining role of IAS 39 hedge accounting.

This is particularly relevant to banks because dynamic interest rate risk management involves portfolios whose composition and risk exposures can change over time.

The IASB is also conducting a post-implementation review of IFRS 9 hedge accounting and related IFRS 7 disclosure requirements. Its Request for Information was published on 28 September 2026, with comments open until 26 January 2027.

Banks therefore need to consider not only the existing differences between IFRS 9 and IAS 39 but also the direction in which hedge accounting and risk mitigation accounting requirements are developing.

Can banks still apply IAS 39 instead of IFRS 9 for hedge accounting?

IFRS 9 has historically allowed entities an accounting policy choice to continue applying the IAS 39 hedge accounting requirements while the IASB developed its approach to macro hedging. This accounting policy choice relates specifically to hedge accounting, while IFRS 9 still applies to areas such as classification, measurement and impairment.

This has been particularly relevant for banks using portfolio-level interest rate risk management techniques.

However, this area is now changing. The proposed Risk Mitigation Accounting requirements are intended to address dynamic interest rate risk management under IFRS 9, and the remaining transitional role of IAS 39 hedge accounting is therefore expected ultimately to come to an end once the new requirements are finalised and become effective.

Banks still applying IAS 39 hedge accounting should therefore monitor the progress of the Risk Mitigation Accounting project and assess its potential implications for their existing hedging processes and systems.

How does IFRS 9 hedge accounting affect bank ALM and Treasury?

For banks, hedge accounting is closely connected to the exposures and risk management decisions originating in Treasury and ALM.

Interest rate exposures arise from the structure and behaviour of assets and liabilities. Treasury may use derivatives such as interest rate swaps to manage those exposures, while hedge accounting determines whether and how qualifying relationships between those exposures and derivatives are reflected in financial reporting.

IFRS 9’s closer connection between hedge accounting and documented risk management objectives can therefore help accounting treatment better reflect qualifying economic hedging relationships.

The removal of the 80–125% threshold and the introduction of rebalancing can also reduce situations in which an economically meaningful hedging relationship needs to be discontinued solely because it falls outside a numerical effectiveness threshold.

However, this does not remove the need to measure and recognise hedge ineffectiveness. Nor does it make every economic hedge eligible for hedge accounting. Banks still need appropriate designation, documentation, valuation, effectiveness assessment and accounting processes.

That makes the connection between ALM, Treasury, derivative valuation, hedge effectiveness testing and hedge accounting particularly important.

How can MORS support hedge accounting and hedge effectiveness testing?

For banks, hedge accounting does not operate independently from Treasury and ALM. The underlying exposures, cash flows, derivatives and valuations originate in the same balance sheet and risk management processes that inform hedging decisions.

MORS brings Treasury, ALM, cash flow modelling, derivative valuation, hedge effectiveness testing and hedge accounting capabilities together within the same environment.

This allows banks to connect designated hedging relationships with the underlying positions and calculations used in their broader interest rate risk and balance sheet management processes.

For example, a bank managing interest rate exposure can analyse the underlying asset or liability cash flows within its ALM framework, value the corresponding derivative positions, perform the required hedge effectiveness analysis and support the associated hedge accounting process using consistent underlying data.

This integrated approach is particularly valuable as the complexity of hedging increases. Rather than relying on separate processes for balance sheet analysis, derivatives, effectiveness testing and accounting calculations, banks can maintain a clearer connection between the economic exposure, the chosen hedging strategy and its accounting treatment.

For banks managing both micro and portfolio-level interest rate risk, that connection between Treasury + ALM + cash flows + derivative valuation + hedge effectiveness testing + hedge accounting provides a stronger foundation for understanding and managing hedging relationships as requirements continue to evolve.