The Problem: When Prudent Risk Management Leads to Disappointing Profits

Consider a life insurer that uses interest rate swaps to manage an investment portfolio with key rate duration (KRD) gaps versus their liabilities. The insurer can use interest rate swaps to hedge these exposures economically, but when rates move and the swaps perform exactly as intended and protect economic value, the financial statements may show significant profit and loss volatility because the derivatives are marked to market through P&L while the hedged items may use different measurement bases. The economic hedge works, but the accounting tells a different story. This disconnect between economic reality and accounting presentation is precisely what Risk Mitigation Accounting (RMA) is best placed to solve.

RMA – Designed to Fix a Shortcoming in IFRS 9

In December 2025, the International Accounting Standards Board (IASB) released an exposure draft1 that details proposed amendments to IFRS 9 and IFRS 7 that would allow companies to better detail the impact of their risk management activities regarding interest rates and repricing risk. When IFRS 9 was introduced in 2018, it included a new hedge accounting model that, by design, did not address macro or portfolio hedging. While hedge accounting under IFRS 9 became principles based as it relates to hedge effectiveness and its linkage to risk management, the IASB acknowledged its shortcomings and thus created a separate project, referred to as the Dynamic Risk Management2 project, to address repricing risk management.

Because of IFRS 9’s limitations, the IASB left in place an option that would allow companies to apply the hedge accounting model in IFRS 9 or to continue to apply the old hedge accounting model in IAS 39 for their dynamic portfolios. But even with the options available, there were still difficulties in applying either model, thus the need for a more comprehensive solution.