The Financial Accounting Standards Board (FASB) has introduced new hedge accounting rules for how companies report on complex financial tools used to manage risks, like future prices of goods or interest rate changes.
The board on November 25, 2025, published Accounting Standards Update (ASU) No. 2025-09, Derivatives and Hedging (Topic 815): Hedge Accounting Improvements, marking a continued effort to align financial reporting with the economic realities of risk management.
The new standard, effective for public business entities in late 2026 and for other entities in late 2027, addresses five key issues such as making it clearer how to judge similar risks for cash flow hedges (a type of hedging strategy) and allowing more types of future non-financial deals to be hedged. While the goal is to make financial reports better reflect real-world risk management, experts say the changes also bring new challenges.
“The amendments might require new models, particularly for nonfinancial components and similar risk assessments, which may introduce additional judgment, documentation, and process and controls updates,” said Bob Michaels, Technical Accounting Lead at CrossCountry Consulting. “In short, the changes don’t make hedge accounting simpler, but they make it more practical and better align financial reporting with entities’ risk management strategies.”
At its heart, “hedge accounting” allows companies to show the financial ups and downs of these risk-managing tools alongside the actual risks they’re trying to protect against. For example, if a company uses a special contract to lock in the price of raw materials they plan to buy in the future, hedge accounting allows them to report the gains or losses from that contract at the same time they report the actual purchase. This prevents sudden, misleading swings in a company’s earnings and gives investors a clearer picture of how well a company is managing its risks.
Michaels acknowledged that some aspects of the new provisions will make things clearer and more consistent, potentially easing some operational burdens. However, he cautioned that hedge accounting remains a very intricate area. “While these changes offer operational improvements, they also require careful implementation and robust processes and controls,” he said. “Preparers should expect benefits but also additional effort to apply the guidance consistently.”
The Driver for Change: Evolving Markets and Past Pain Points
The journey to ASU 2025-09 has been a long one for the FASB, shaped by previous attempts to refine hedge accounting and, notably, the tumultuous transition away from the London Interbank Offered Rate (LIBOR). LIBOR, once the global benchmark for interest rates, was phased out due to manipulation scandals, forcing a scramble for new reference rates and exposing significant gaps in existing accounting guidance.
“The new standard clarifies the application of previous guidance and addresses emerging issues identified by stakeholders, including those related to reference rate reform,” said FASB Chair Richard Jones in a statement. “The improvements will better reflect the economics of organizations’ risk management activities.”
The new update tackles five key areas, each representing a past friction point between accounting theory and business practice:
- More Flexibility for Cash Flow Hedges: In the past, companies found it tough to group different future transactions together for hedging purposes if their risk exposures weren’t identical. The post-LIBOR world, with its mix of new interest rates, made this even harder. The new rules now allow companies to group transactions with “similar risk,” meaning a broader range of future transactions can be hedged. While this will give a clearer picture of how companies manage risk, it also means they’ll need to work harder to explain and document what makes these risks “similar.”
- Easier Hedging for Raw Materials and Other Nonfinancial Assets: For instance, a company that needs copper. Previously, hedging against changing copper prices was tricky, often requiring very specific contracts. The new rules are more flexible, allowing companies to hedge against price changes for specific parts of nonfinancial assets, even if they’re buying them on the spot market. This is important for businesses that rely on commodities, letting their accounting better reflect how they actually manage risks in their supply chains.
- Simpler Accounting for Flexible Debt: Many companies have loans where they can choose from different interest rate options. Under the old rules, switching between these options could cause accounting headaches. The new standard makes it easier to keep hedging accounting consistent even if the company changes its chosen interest rate, as long as that option was part of the original loan agreement. This recognizes common business practice and avoids penalizing smart financial decisions.
- Allowing Complex Hedging Tools: Some financial tools combine different elements, like a swap with an option. Previously, if these were seen as “net written options,” they were often excluded from hedge accounting, even if they were effective at managing risk. The new standard provides relief here, allowing these sophisticated tools to be used for interest rate hedges without automatically failing the “net written option” test, promoting financial innovation.
- Clearer Accounting for Foreign Currency Debt: For global companies, managing debt in foreign currencies is complicated. They might be hedging against changes in the value of their investments in foreign subsidiaries while also managing the interest rate risk on that same foreign debt. The old rules often led to confusing financial reports. The new standard clarifies how gains and losses from the interest rate part of this debt are reported, giving a more accurate picture of these multi-layered hedging strategies.
When Companies Need to Adopt the Changes
For publicly traded companies, the changes will take effect for financial reporting periods that begin after December 15, 2026. This includes both their yearly reports and shorter, interim reports within those years. Other types of companies, which aren’t publicly traded, get a bit more time. Their deadline is for financial reporting periods that begin after December 15, 2027.
However, the changes can be adopted earlier. The FASB is allowing all companies to start using the new guidance at any point once issued. This gives businesses the flexibility to implement the changes when it makes the most sense for them, potentially allowing them to benefit from the updated rules sooner.
When companies do adopt the new standard, they must apply it “prospectively,” according to the rules’ text. This means the guidance will apply to all new hedging arrangements they enter into, as well as their ongoing hedging activities, from the adoption date forward. Companies will not have to go back and redo their financial reports from previous periods. Specifically for existing “cash flow hedges”, companies have an option: they can update how they assess similar risks and adjust their hedging strategies to fit the new guidelines. Importantly, they can do this without necessarily having to stop and restart their existing hedge accounting.
The Road Ahead for Preparers
While the new accounting rules aim to make hedging easier and more reflective of how businesses truly manage risk, they “introduce additional complexity,” according to Michaels. Areas that may need extra focus include:
- Understanding the New “Similar Risk” and Nonfinancial Asset Rules: Accountants will need to deeply grasp the updated requirements for deciding if different risks are “similar” enough to be grouped for hedging. They’ll also need to understand the new way to account for hedging against price changes in nonfinancial items like raw materials.
- Updating Systems and Processes: Companies will likely need to review and possibly update their existing computer models and internal procedures for identifying, setting up, and checking how well their hedges are working.
- More Detailed Record-Keeping: Because the new rules involve more judgment calls, companies will need to improve their documentation to clearly explain their decisions.
- Strengthening Internal Checks: Businesses will need to examine their internal controls to make sure they can consistently apply the new guidelines across all their operations.
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