When an entity decides how to apply hedge accounting, the requirements and treatments change depending on whether IFRS 9 or ASC 815 applies.

How the three types differ

IFRS 9 (an IFRS Accounting Standard) and ASC 815 (US generally accepted accounting principles, US GAAP) both divide hedging relationships into fair value hedges, cash flow hedges, and hedges of a net investment1. The general explanation of the types and of hedge designation documents is in Hedge Accounting Basics. The focus here is the points on which the two standards differ in hedge accounting.

The IFRS 9 column rests on the December 2013 compiled AASB 92. The description of the presentation line, however, rests on the Basis for Conclusions of ASU 2017-12. The ASC 815 column rests on the text of ASU 2017-12 (August 2017) and its Basis for Conclusions.

Type IFRS 9 ASC 815 (after ASU 2017-12)
Fair value hedge The gain or loss on the hedging instrument goes to profit or loss. The gain or loss on the hedged item due to the hedged risk also goes to profit or loss and adjusts its carrying amount3. The standard does not broadly specify the income statement line4 The whole change in the fair value of the hedging instrument that is included in the effectiveness assessment is presented in the same line as the earnings effect of the hedged item5.
Cash flow hedge The effective portion goes to other comprehensive income, and the ineffective portion goes to profit or loss3. The whole change included in the effectiveness assessment goes to other comprehensive income. It is reclassified to the same line when the hedged item affects earnings. The ineffective portion is not measured and recognized separately5.
Net investment hedge As in a cash flow hedge, the effective portion goes to other comprehensive income and the ineffective portion to profit or loss. The accumulated amount is reclassified to profit or loss when the foreign operation is disposed of3. The whole change included in the assessment goes to the translation adjustment category of other comprehensive income5.

In an IFRS 9 cash flow hedge, the amount recorded in other comprehensive income is reclassified to profit or loss in the period in which the hedged item affects profit or loss. It is included in the cost of a non-financial asset when the hedged item leads to its acquisition3.

The largest difference is in the treatment of the ineffective portion. According to the Basis for Conclusions of ASU 2017-12, IFRS 9 recognizes the ineffective portion of a hedge in profit or loss and discloses it separately. In ASU 2017-12, ASC 815 removed the requirement to measure and disclose the ineffective portion separately4.

Effectiveness requirements

IFRS 9 makes it a condition of hedge accounting that the hedging relationship meets the following three requirements on hedge effectiveness6. It does not set a numerical range.

  1. There is an economic relationship between the hedged item and the hedging instrument.
  2. The effect of credit risk does not dominate the value changes that result from that economic relationship.
  3. The hedge ratio is the same as the ratio resulting from the quantity of the hedged item the entity actually hedges and the quantity of the hedging instrument it actually uses.

The three conditions are joined by "and." If any one is missing, the effectiveness requirements are not met. An economic relationship means that the value of the hedging instrument and the value of the hedged item generally move in opposite directions because of the same risk. A statistical correlation alone cannot support a conclusion that an economic relationship exists7. An example in which the effect of credit risk dominates is an unsecured derivative used to hedge a commodity price. If the counterparty's credit worsens significantly, the fair value of the derivative moves more with the counterparty's credit than with the commodity price8.

The hedge ratio in IFRS 9 is the relationship between the relative weights of the quantity of the hedging instrument and the quantity of the hedged item9. For example, if an entity hedges 85% of the hedged item, it designates a ratio based on the quantity of that 85%. However, the designation must not reflect an imbalance in the quantities that would create an accounting outcome inconsistent with the purpose of hedge accounting10. This differs from the percentage in a risk management statement such as "we hedge 30% of the hedged item." The IFRS 9 designation uses the ratio of quantities, not that percentage11. The glossary entry linked above explains the term in the sense of a percentage.

The next figure lays out the three requirements above in the order of the questions. The eligibility of the hedged item and the hedging instrument, and the designation documentation, are separate conditions (covered in the later section "What can be designated as hedging instruments and hedged items").

YesNoIs there an economicrelationship (valuesgenerally moveoppositely)?Effectivenessrequirementsnot metYesNoIs it a case other thanone where credit riskdominates the valuechanges?Effectivenessrequirementsnot metYesNoIs the hedge ratio thesame as the ratio fromthe quantities actuallyhedged and used?Effectivenessrequirementsnot metAll threerequirementsare met
Figure 1Assessing the three IFRS 9 effectiveness requirements
Figure description

The figure asks the three requirements in paragraph 6.4.1(c) of IFRS 9, from the top down. If the answer to any question is "No," the requirements are not met. If it is "Yes," you go on to the next question. The third question is "Yes" when the hedge ratio is the same as the ratio resulting from the quantities actually hedged and actually used, and the designation does not reflect an imbalance in the quantities that would create an accounting outcome inconsistent with the purpose of hedge accounting. This imbalance condition is explained in the hedge ratio paragraph before the figure. Only when all three answers are "Yes" are all three requirements met. The figure covers the effectiveness requirements only. It does not include other conditions, such as the eligibility of the hedged item and the hedging instrument or the designation documentation.

The assessment is made at the inception of the hedging relationship and on an ongoing basis. It is made at least at each reporting date or on a significant change in the circumstances affecting the effectiveness requirements, whichever comes first, and it looks only forward. The standard does not prescribe a method. A qualitative assessment may be enough when the critical terms match, and a quantitative assessment may be needed when they do not12.

ASC 815 requires that the hedging relationship be expected to be "highly effective" in offsetting changes in fair value or cash flows, both at inception and on an ongoing basis13. The initial assessment is quantitative, except for exceptions such as the shortcut method14. After ASU 2017-12, the subsequent assessment can sometimes be qualitative. This is the case when the initial quantitative assessment shows that the hedge is highly effective and the expectation can later be supported qualitatively. In that case, the entity confirms that the facts and circumstances have not changed, and documents this, at least quarterly15. If the hedge is no longer highly effective, the requirements for hedge accounting are no longer met15.

ASC 815 retains methods that allow the quantitative assessment to be skipped. When a hedge of a certain interest rate risk with an interest rate swap meets all the conditions, the shortcut method allows the entity to assume that no ineffectiveness arises. When the critical terms of the hedging instrument and the hedged item are the same, the entity may in some cases conclude that the hedge is expected to offset completely16. After ASU 2017-12, if it turns out that the shortcut method was not appropriately applied but the hedge is highly effective, the entity can continue to assess it using a quantitative method documented in advance17.

What can be designated as hedging instruments and hedged items

As of October 2026, the ASC 815 column rests on the text of ASU 2017-12. According to the Basis for Conclusions, IFRS 9 broadly revisited the eligibility of hedging instruments and hedged items, while the ASU kept the existing framework and made targeted improvements focused on practical issues. This difference shows up in what can be designated4.

Item IFRS 9 ASC 815 (after ASU 2017-12)
Components of hedged items A risk component that is separately identifiable and reliably measurable can be designated, whether the item is financial or non-financial20. The 2017 ASU made it possible to designate a contractually specified component for a forecasted transaction in a non-financial asset, and a contractually specified interest rate for a variable-rate financial instrument21.
Non-derivative hedging instruments A non-derivative financial instrument measured at fair value through profit or loss can be designated. For risks other than foreign currency risk, it is designated in its entirety or as a proportion22. A non-derivative such as a US Treasury security cannot be designated except in limited cases such as a fair value hedge of a foreign currency firm commitment or a net investment hedge23.
Written options A written option can be used only when it is designated as an offset to a purchased option. A combination that is a net written option cannot be designated24. Together with the hedged item, the potential for gain must be at least as great as the potential for loss25.

As for components of hedged items, ASC 815 also limits the benchmark rates that can be designated in a fair value hedge of interest rate risk21.

The ASC 815 treatment of components of hedged items and of written options partly changes under ASU 2025-09, issued in 2025.

Rebalancing and discontinuing hedge accounting

When a hedging relationship no longer meets the hedge ratio requirement but the risk management objective is unchanged, IFRS 9 requires the entity to adjust the hedge ratio and keep the relationship. This adjustment is called rebalancing26. Rebalancing is treated as a continuation of the hedging relationship, and the ineffective portion is measured and recognized in profit or loss immediately before the adjustment27.

Rebalancing can handle a change in the relationship between the hedging instrument and the hedged item that a change in the ratio can compensate for. Suppose an entity hedges the foreign currency risk of one currency with a derivative on another currency linked to it by a fixed exchange rate, and the level of that fixed rate changes. Rebalancing of the ratio can keep the relationship going. If the derivative used as the hedging instrument defaults, changing the ratio cannot compensate28. When the risk management objective itself has changed, hedge accounting is discontinued rather than rebalanced29.

Deep diveHow rebalancing is carried out

Consider a hypothetical example in which company S hedges the price risk of 100 tonnes of a commodity with a forward contract of 100 tonnes. IFRS 9 says rebalancing can be done by changing one of four quantities30.

Way of adjusting Example Treatment after the change
Increase the quantity of the hedged item 100 tonnes becomes 110 tonnes Changes in the value of the added 10 tonnes are measured from the date of the adjustment31.
Decrease the quantity of the hedging instrument The forward contract goes from 100 tonnes to 90 tonnes The 10 tonnes taken out are measured at fair value through profit or loss unless they are designated in another hedging relationship30.
Increase the quantity of the hedging instrument The forward contract becomes 110 tonnes Changes in the fair value of the added quantity are included from the date of the adjustment32.
Decrease the quantity of the hedged item 100 tonnes becomes 90 tonnes The quantity taken out is handled under the discontinuation requirements of hedge accounting33.

IFRS 9 discontinues hedge accounting only when the relationship no longer meets the criteria after rebalancing has been considered. This includes the expiry, sale, termination, or exercise of the hedging instrument34. While the criteria are met, the entity cannot discontinue it by choice. ASC 815, by contrast, lets an entity remove the designation of a hedging relationship at any time. ASU 2017-12 did not change this4.

The way ASC 815 describes for changing the critical terms of a hedging relationship (including the method of assessing effectiveness) is to remove the original designation and make a new designation that includes the change35.

Treatment of the cost of hedging

IFRS 9 permits part of a hedging instrument to be left out of the designation. For an option, the entity can exclude the time value and designate only the change in intrinsic value. For a forward contract, it can exclude the forward element and designate only the change in the spot element. The currency basis spread can also be excluded from the designation of the hedging instrument36. An audit firm's publication calls the excluded part the cost of hedging37.

When the time value is excluded, the standard sets the treatment. The treatment of changes in time value splits into two, depending on the hedged item38.

If the hedged item is transaction related (for example, a purchase of goods, where the time value has the character of a cost of the transaction), the change is recorded in other comprehensive income and reclassified to profit or loss when the transaction affects profit or loss. If the transaction leads to the acquisition of a non-financial asset, the amount is included in its cost.

If the hedged item is time-period related (the time value has the character of a cost of obtaining protection over a period), the initial time value is allocated to profit or loss on a systematic basis over the period, and the change is recorded in other comprehensive income38.

The forward element and the currency basis spread can be given the same treatment as the time value, as an election39.

ASC 815 also allows time value, the forward points of a forward contract, and the currency basis spread of a currency swap to be excluded from the effectiveness assessment19. ASU 2017-12 provided two options for treating the excluded part (the excluded component). One is to amortize the initial value to profit or loss over the period using a rational method and to record the difference from the change in fair value in other comprehensive income. The other is to recognize the change in fair value in profit or loss.

The entity applies the chosen method consistently to similar hedges40. The amount that reaches profit or loss is presented in the same line as the earnings effect of the hedged item41.

Consider a hypothetical example in which company S plans to buy raw materials in one year. It buys a call option for the purchase at a premium of 12 million yen. The example compares profit or loss before and after the hedge designation. The intrinsic value at purchase is 0, so the whole premium is time value.

Company S excludes the time value and designates only the change in intrinsic value as the hedging instrument. The hedged item is the purchase of raw materials, the time value is assumed to have the character of a cost of the transaction, the terms of the option match the hedged item, and no ineffective portion arises. Six months later, the option has an intrinsic value of 0 and a time value of 7 million yen. At the purchase one year later, the raw material price has risen, and the option has an intrinsic value of 4 million yen and a time value of 0.

Item (profit or loss up to the purchase; unit: million yen) After 6 months After 1 year Total
Change in the fair value of the whole option −5 −3 −8
Change in intrinsic value 0 +4 +4
Change in time value −5 −7 −12
Profit or loss (no hedge accounting) −5 −3 −8
Profit or loss (hedge accounting, IFRS 9) 0 0 0
Profit or loss (hedge accounting, ASC 815, excluded component amortized) −6 −6 −12
Profit or loss (hedge accounting, ASC 815, excluded component's change in profit or loss) −5 −7 −12

The table shows profit or loss up to the purchase.

Profit or loss without hedge accounting is the change in the whole option. After 6 months it is 7 − 12 = −5, after 1 year it is 4 − 7 = −3, and the total is −8. Under IFRS 9, the changes in time value of −5 and −7 go to other comprehensive income, so profit or loss in these periods is 0. At purchase, the accumulated −12 is added to the cost of the raw materials (the cost rises by 12 million yen), and the +4 in intrinsic value is deducted from the cost.

Under ASC 815, straight-line amortization gives 12 ÷ 12 months × 6 months = 6 as profit or loss for each period, and the differences from the change in fair value, +1 and −1, go to other comprehensive income. Under the method that recognizes changes in fair value in profit or loss, the changes in time value of −5 and −7 appear in profit or loss as they are. Under both ASC 815 methods, the +4 in intrinsic value goes to other comprehensive income and is reclassified to profit or loss when the raw materials affect profit or loss42.

Under IFRS 9, the cost of the raw materials rises by 12 million yen and falls by the 4 million yen of intrinsic value, so in the period in which the raw materials are sold, the net effect on profit or loss is a loss of 8 million yen (−8). Under the two ASC 815 methods, the −12 up to the purchase plus the +4 in the period of sale gives the same −8.

The total change in time value of −12 is common to the three methods. What differs is when it reaches profit or loss. Under IFRS 9, it does so through the cost of the raw materials, in the period in which they are sold. If the raw material price had fallen and the call expired worthless, the total change in time value would be the same −12 and the treatment would be the same. In that case the purchase price falls, but the premium remains as an expense. This example assumes straight-line amortization for ASC 815 and ignores discounting and tax.

Amendments and developments as of October 2026

In November 2025, the FASB issued ASU 2025-09, "Hedge Accounting Improvements." Public business entities apply it to fiscal years beginning after December 15, 2026, and all other entities to fiscal years beginning after December 15, 2027. Early adoption is permitted43. Three of the amendments bear on this comparison44.

  1. For cash flow hedges of forecasted transactions in non-financial assets, the amendment drops the limit to contractually specified components. A price component can be designated if it is clearly and closely related to the purchase price or the sales price.
  2. For interest rate risk hedges, the net written option test is not applied to a compound derivative made up of a swap and a written option.
  3. For variable-rate debt on which the borrower can choose the index and the term (choose-your-rate debt), a change in the designated rate does not automatically terminate the hedge designation, under certain conditions.

The IASB is accepting comments until November 30, 2026, on its proposed amendments to IFRS 9 and IFRS 7 on the accounting for interest rate risk managed on a net basis (Risk Mitigation Accounting)45.

A July 2014 IASB document says that, when IFRS 9 was introduced, entities were allowed to choose as an accounting policy whether to apply the hedge accounting requirements of IFRS 9 or those of IAS 3946.

Disclosures about hedge accounting are covered in Disclosures in the Notes.

What this page does not cover

This page does not cover the following five points.

  • Any mechanism in ASC 815 that corresponds to IFRS 9 rebalancing
  • The treatment on discontinuing hedge accounting for each type
  • The changes in requirements that the IASB proposal (Risk Mitigation Accounting) would bring
  • The accounting policy choice at the introduction of IFRS 9 (IFRS 9 or IAS 39), as applied in October 2026
  • Amendments to IFRS 9 after December 2013

Notes

  1. AASB, "AASB 9 Financial Instruments" (compiled December 2013), paragraph 6.5.2 (page 35). FASB, "ASU 2017-12," 815-20-25-3(b) (page 33), says the documentation requirement at inception applies to "fair value hedges, cash flow hedges, and net investment hedges." ↩

  2. The "Compliance with IFRS 9" (page 10) in the compiled AASB 9 says that an entity that complies with this version of AASB 9 also complies with IFRS 9. The compilation includes amendments up to December 20, 2013. Paragraph numbers are the same as in IFRS 9. ↩

  3. AASB, "AASB 9 Financial Instruments" (compiled December 2013), paragraph 6.5.8 (fair value hedges; page 37), paragraph 6.5.11 (cash flow hedges; pages 38–39), and paragraphs 6.5.13–6.5.14 (net investment hedges; page 40). The treatment differs for an equity instrument whose fair value changes are presented in other comprehensive income (paragraphs 6.5.3 and 6.5.8). ↩ ↩2 ↩3 ↩4

  4. FASB, "ASU 2017-12," BC234–BC236 (pages 390–391). BC236 lists the differences as (a) the highly effective threshold, (b) separate recognition and disclosure of ineffectiveness, (c) the income statement line, (d) interest rate risk components, (f) excluded components, and (g) voluntary removal of a designation. It was written in August 2017 and assumes the version of IFRS 9 completed in July 2014. ↩ ↩2 ↩3 ↩4

  5. FASB, "ASU 2017-12," Summary (pages 3–5). The fact that the presentation of the excluded component in a net investment hedge is not specified is also in the same place. ↩ ↩2 ↩3

  6. AASB, "AASB 9 Financial Instruments" (compiled December 2013), paragraph 6.4.1(c)(i)–(iii) (pages 34–35). ↩

  7. AASB, "AASB 9 Financial Instruments" (compiled December 2013), B6.4.4–B6.4.6 (pages 119–120). The statement that a statistical correlation alone cannot support an economic relationship is in B6.4.6. ↩

  8. AASB, "AASB 9 Financial Instruments" (compiled December 2013), B6.4.7–B6.4.8 (page 120). ↩

  9. AASB, "AASB 9 Financial Instruments" (compiled December 2013), the definition of hedge ratio in Appendix A (page 53). ↩

  10. AASB, "AASB 9 Financial Instruments" (compiled December 2013), B6.4.9–B6.4.10 (pages 120–121). The 85% example is in B6.4.9. ↩

  11. KPMG AZSA LLC, "IFRSの改訂ヘッジ会計 ～ケースで学ぶIFRS第7号の開示の作成方法～" (Revised hedge accounting under IFRS: how to prepare IFRS 7 disclosures through cases; in Japanese; English title added by this site) (May 2018), page 6. It explains that a risk management "hedge ratio of 30%" differs from the meaning defined in IFRS 9. ↩

  12. AASB, "AASB 9 Financial Instruments" (compiled December 2013), B6.4.12–B6.4.16 (pages 122–123). ↩

  13. FASB, "ASU 2017-12," 815-20-25-75 (page 65). ↩

  14. FASB, "ASU 2017-12," 815-20-25-3(b)(2)(iv) (pages 33–34). The quantitative assessment is a dollar-offset or a statistical method such as regression analysis, and the exceptions include the shortcut method and matching of critical terms. ↩

  15. FASB, "ASU 2017-12," 815-20-35-2 and 35-2A to 35-2C (pages 93–95). The quarterly confirmation is in 35-2C, and the treatment when the requirements are no longer met is in 35-2. ↩ ↩2

  16. FASB, "ASU 2017-12," 815-20-25-102 (page 74; the shortcut method) and 815-20-25-84 (page 69; when the critical terms are the same). ↩

  17. FASB, "ASU 2017-12," Summary (page 6), item 5 of the other simplifications. ↩

  18. AASB, "AASB 9 Financial Instruments" (compiled December 2013), paragraph 6.4.1(b) (page 34). ↩

  19. FASB, "ASU 2017-12," 815-20-25-82 (page 68). It lists time value, the spot-forward difference of forwards and futures (the difference from the spot price), and the currency basis spread of a currency swap. ↩ ↩2

  20. AASB, "AASB 9 Financial Instruments" (compiled December 2013), paragraph 6.3.7(a) (pages 33–34). ↩

  21. FASB, "ASU 2017-12," Summary (page 2) and BC236(d) (page 391). This is the description as of August 2017. ↩ ↩2

  22. AASB, "AASB 9 Financial Instruments" (compiled December 2013), paragraph 6.2.2 (page 31) and B6.2.5 (page 107). ↩

  23. FASB, "ASU 2017-12," 815-20-25-71(a)(1) (pages 63–64), and the exceptions it lists, 815-20-25-58 (fair value hedge of foreign currency risk in a firm commitment) and 25-66 (net investment hedge). ↩

  24. AASB, "AASB 9 Financial Instruments" (compiled December 2013), paragraph 6.2.6 (page 32) and B6.2.4 (pages 106–107). ↩

  25. FASB, "ASU 2017-12," 815-20-25-94 (page 72). The test in this paragraph applies only at the inception of the hedging relationship (25-95). ↩

  26. AASB, "AASB 9 Financial Instruments" (compiled December 2013), paragraph 6.5.5 (page 36). ↩

  27. AASB, "AASB 9 Financial Instruments" (compiled December 2013), B6.5.7–B6.5.8 (page 125). ↩

  28. AASB, "AASB 9 Financial Instruments" (compiled December 2013), B6.5.9–B6.5.11 (page 126). The fixed exchange rate example and the default example are in B6.5.10. ↩

  29. AASB, "AASB 9 Financial Instruments" (compiled December 2013), B6.5.15 (page 128). ↩

  30. AASB, "AASB 9 Financial Instruments" (compiled December 2013), B6.5.16 (pages 128–129). ↩ ↩2

  31. AASB, "AASB 9 Financial Instruments" (compiled December 2013), B6.5.17 (page 129). ↩

  32. AASB, "AASB 9 Financial Instruments" (compiled December 2013), B6.5.19 (pages 129–130). ↩

  33. AASB, "AASB 9 Financial Instruments" (compiled December 2013), B6.5.20 (page 130). ↩

  34. AASB, "AASB 9 Financial Instruments" (compiled December 2013), paragraph 6.5.6 (page 36). The exceptions for the replacement of a hedging instrument and novation to a clearing counterparty are in the same paragraph. ↩

  35. FASB, "ASU 2017-12," 815-20-55-56 (page 120). ↩

  36. AASB, "AASB 9 Financial Instruments" (compiled December 2013), paragraph 6.2.4(a)(b) (pages 31–32). ↩

  37. KPMG IFRG Limited, "Hedge accounting moves closer to risk management" (November 2013), page 3. KPMG AZSA LLC, "IFRSの改訂ヘッジ会計" (Revised hedge accounting under IFRS; in Japanese; English title added by this site) (May 2018), page 1, uses the same term. The text of Chapter 6 of IFRS 9 does not use this term. ↩

  38. AASB, "AASB 9 Financial Instruments" (compiled December 2013), paragraph 6.5.15 (pages 40–41) and B6.5.29 (pages 135–136; the distinction between transaction related and time-period related). ↩ ↩2

  39. AASB, "AASB 9 Financial Instruments" (compiled December 2013), paragraph 6.5.16 (page 42). BC236(f) of ASU 2017-12 (page 391) also says that the forward element and the currency basis spread are an accounting policy election. ↩

  40. FASB, "ASU 2017-12," 815-20-25-83A (pages 68–69; the amortization method) and 25-83B (page 69; the method of recognizing in profit or loss). ↩

  41. FASB, "ASU 2017-12," Summary (page 5). ↩

  42. FASB, "ASU 2017-12," 815-20-55-235 to 55-237 (pages 179–180) gives an example of a similar call option in which the time value is amortized on a straight-line basis, the change in fair value is recorded in other comprehensive income, and the amortized amount is recognized in profit or loss. The figures in the text are a hypothetical example for company S that follows that procedure, calculated by hand. ↩

  43. FASB, "ASU 2025-09" (November 2025), Summary (page 5). It applies prospectively, and on adoption it also permits certain critical terms of existing hedging relationships to be changed without removing the designation. ↩

  44. FASB, "ASU 2025-09," Summary (pages 3–4; components of non-financial assets and written options) and the list of Codification changes (pages 7–9; the amendment of 815-20-55-56, the removal of 815-20-25-22A to 22B, and the amendment of 815-20-25-88). ↩

  45. IFRS Foundation, "Dynamic Risk Management" project page (checked on October 5, 2026). The comment deadline is November 30, 2026, which the IASB extended in May 2026. ↩

  46. IFRS Foundation, "IFRS 9 Financial Instruments Project Summary" (July 2014), page 29. ↩