FASB Issues Hedge Accounting Improvements

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• On Nov. 25, 2025, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2025-09, “Derivatives and Hedging (Topic 815): Hedge Accounting Improvements,” which amends Accounting Standards Codification (ASC) Topic 815, “Derivatives and Hedging,” in five specific areas: 
  • Similar risk assessment for cash flow hedges. Introduces a more flexible “similar risk” standard for pooling forecasted transactions, which permits broader grouping of exposures and reduces the likelihood of missed forecasts. 
  • Hedging forecasted interest payments on choose-your-rate (CYR) debt instruments. Establishes a clear, operable model for hedging CYR debt, permitting changes in index or tenor without automatically triggering dedesignation. 
  • Cash flow hedges of nonfinancial forecasted transactions. Expands component hedging by establishing a principles-based approach for designating clearly-and-closely-related price components, enabling hedge accounting for a wider range of commodity exposures, including spot-market transactions. 
  • Net written options as hedging instruments. Clarifies that common “swap-plus-floor” hedging instruments are not treated as net written options, allowing these compound derivatives to qualify as hedging instruments. 
  • Foreign-currency-denominated debt instrument designated as hedging instrument and hedged item (dual hedge). Restores operability of the dual-hedge strategy by excluding fair value hedge basis adjustments from the net investment hedge effectiveness assessment. 
• The ASU is intended to simplify application of the hedge accounting guidance; clarify areas of the guidance to better align with the objectives of ASU 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities”; and more closely reflect entities’ risk management activities. The amendments enable entities to achieve and maintain hedge accounting for certain highly effective economic hedges. 
• The amendments are effective for annual periods beginning after Dec. 15, 2026, for public business entities and after Dec. 15, 2027, for all other entities, with early adoption permitted. Transition for certain existing hedges is elective. 

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Background 

The FASB issued ASU 2025-09 in response to stakeholder requests to clarify aspects of ASU 2017-12 as well as to address hedging issues related to reference rate reform.

The new amendments apply to five specific areas in ASC 815 and are intended to better reflect entities’ risk management strategies in financial reporting by enabling entities to achieve and maintain hedge accounting for a greater number of highly effective economic hedges and limiting the occurrence of unintuitive dedesignation events. 

Breaking it down: Amendments in 5 areas 

Similar risk assessment for cash flow hedges (groups of individual forecasted transactions) 

This amendment expands the hedged risks permitted to be aggregated in a cash flow hedge of a group of forecasted transactions by replacing the current shared risk exposure requirement with a more flexible similar risk exposure requirement. Under the amended guidance, an entity would assess risk similarity at both hedge inception and on an ongoing basis using one of the following methods: 

• Determining if the designated hedging instrument is highly effective in offsetting changes in cash flows for each hedged risk in the group (assessed on an individual basis) 
• Determining whether each hedged risk related to a forecasted transaction is similar to each other’s hedged risk in the group

Under either method, entities would assess whether the hedging instrument is highly effective in offsetting each hedged risk. Entities must apply the selected method consistently to similar hedges. If an entity applies one of the qualitative methods described in paragraph 815-20-25-3(b)(2)(iv)(01) and applies the first method as described in 815-20-55-23A(a), the entity may assume the hedged risks related to the group of forecasted transactions are similar.

The change from shared risk exposure to similar risk exposure is intended to allow entities to apply hedge accounting in a more efficient, cost-effective manner while reducing the risk of missed forecasts for highly effective economic hedges. If at any time the risks are determined to be dissimilar, hedge accounting should be discontinued. 

The ASU provides examples illustrating the application of this new guidance beginning in 815-20-55-88. 

Crowe observation: The ASU provides transition relief allowing entities to realign accumulated other comprehensive income (AOCI) from previously dedesignated pools into newly combined hedged pools when reorganizing under the similar risk requirement. Practically, this allows entities to merge AOCI from previously dedesignated hedges into the AOCI balance of a new combined pool, simplifying tracking and release patterns. For example, an entity currently hedging Secured Overnight Financing Rate-Overnight Index Swap and Prime interest payments in separate pools may, upon adoption, combine them into a single pool and consolidate the related AOCI. After realignment, AOCI is tracked and released on a combined basis as forecasted transactions occur, reducing operational complexity.

Hedging forecasted interest payments on CYR debt instruments

The amendments provide a model for a cash flow hedge of forecasted interest payments on variable rate CYR debt, under which selecting a different index or tenor in a later period does not automatically require the hedge dedesignation. Importantly, this new model only applies to issuers of CYR debt and cannot be applied by analogy to other types of hedging relationships and entities.

The new guidance permits an entity to change the index or tenor of its CYR debt without causing dedesignation as long as the change is to a rate or tenor consistent with the contractual terms of the debt and that rate or tenor was included in the hedge documentation.

Under the new model, an entity uses a single rate that represents its best estimate of the index and tenor to assess effectiveness, ignoring the optionality of selecting other rates in the future. Entities also may apply simplified assumptions when assessing the probability that forecasted transactions will occur. Under the new model, if it is probable that any of the documented indexes and tenors will be selected, hedge accounting may be continued, assuming all other conditions for hedge accounting are met.

The new guidance addresses a common strategy for managing interest rate risk that is not addressed under the current guidance. The amendments aim to help entities avoid unintuitive dedesignations and missed forecasts, allowing hedge accounting to better reflect economic risk management activities.

The ASU provides an example illustrating this new guidance beginning in 815-30-55-165.

Crowe observation: The CYR model establishes a clear and operable framework for hedging variable rate debt that allows borrowers to change the reference index or tenor under certain conditions without requiring dedesignation and causing a missed forecast. The new model also accommodates replacement debt, provided the expected rate is included within the hedge documentation and the hedged interest payments remain probable of occurring. 

Cash flow hedges of nonfinancial forecasted transactions (component hedging)

In 2017, the FASB introduced guidance allowing entities to hedge the variability in cash flows attributable to a contractually specified component of a nonfinancial asset’s purchase or sale price. This approach was intended to better align hedge accounting with risk management by focusing on price components explicitly referenced in a contract’s pricing formula.

After implementation, stakeholders requested clarification on how to apply this guidance, particularly regarding the documentation necessary to support that a component is contractually specified; how to determine whether a component truly drives the transaction price; and how to apply the model to spot-market transactions where no written contract exists.

The ASU expands hedge accounting for cash flow hedges of components (or subcomponents) of the forecasted purchase or sales price of nonfinancial assets. If the price of the nonfinancial asset is not determined based on a pricing formula in an agreement, a variable component may be hedged if it is considered clearly and closely related to the nonfinancial asset being purchased or sold. This guidance generally is applicable to spot purchases and sales.

If the price of the nonfinancial asset is determined based on a pricing formula in the agreement, a variable component may be hedged if that component is explicitly referenced in the pricing formula and considered clearly and closely related to the nonfinancial asset purchased or sold. In addition, a variable subcomponent may be designated as the hedged risk if that subcomponent is clearly and closely related to a variable component that is 1) explicitly referenced in the pricing formula in the agreement and 2) considered clearly and closely related to the nonfinancial asset being purchased or sold.

To reduce diversity in practice, the ASU clarifies that hedging a variable price component or subcomponent is not precluded if the associated forecasted purchase or sale of the nonfinancial asset is based on a contract that is accounted for as a derivative, as long as all of the conditions for hedge accounting are met.

The ASU revises various existing examples in Topic 815 for this new guidance and provides several new examples beginning in 815-30-55-149.

Crowe observation: These amendments are expected to expand the types of highly effective economic hedges that may qualify for hedge accounting and thus more closely align with entities’ risk management strategies. The board’s shift from the contractually specified component model to a clearly-and-closely-related principle reflects its conclusion that the previous guidance was too narrow and difficult to apply to common commodity-based purchasing strategies. Entities can designate as the hedged risk a component that clearly influences the pricing of the underlying commodity, even when that component is not explicitly stated in a contract. Operationally, this reduces the need for extensive contractual documentation, expands the ability to hedge economically meaningful price exposures, and provides a more consistent basis for determining eligible components across similar transactions.

Net written options as hedging instruments

This amendment permits certain compound derivatives that consist of a written option (for example, a written floor) and a nonoption derivative (for example, a swap) to qualify as hedging instruments in a cash flow hedge without requiring the entity to apply the net written option test under previous guidance.

Under the ASU, a compound derivative resulting from combining a written option with a nonoption derivative instrument is not considered a written option and therefore is eligible to be a hedging instrument, if all the following criteria are met:

• The compound derivative is designated as the hedging instrument in a cash flow or fair value hedge of interest rate risk.
• The compound derivative is a combination of a swap and a written option.
• The notional amount of the swap equals the notional amount of the written option.

Crowe observation: This amendment represents a targeted solution to address operability issues that emerged after the London Interbank Offered Rate’s discontinuation. Because swap-plus-floor hedging instruments continue to be used in practice and can provide highly effective economic offsets, treating these compound derivatives as net written options, and often precluding hedge accounting, became unnecessarily restrictive.

Foreign-currency-denominated debt as both hedging instrument and hedged item (dual hedge)

Under the ASU, when the same foreign-currency-denominated debt is designated as 1) the hedging instrument in a net investment hedge and 2) the hedged item in a fair value hedge of interest rate risk, the fair value hedge basis adjustment is excluded from the net investment hedge effectiveness assessment. Therefore, the remeasurement of basis adjustment based on the spot rate under Topic 830, “Foreign Currency Matters,” is immediately recognized in earnings.

This new guidance was necessary to eliminate the mismatch that resulted from the issuance of ASU 2017-12, which required the remeasurement of the basis adjustment to be recognized in AOCI, while the remeasurement of the interest rate derivative was recognized in earnings. This improvement will enable entities to better reflect the economic offset of changes attributable to both interest rate risk and foreign exchange risk.

Crowe observation: The ASU restores the operability of the dual-hedge strategy by requiring an entity to exclude the fair value hedge basis adjustment from the assessment of effectiveness in the net investment hedge, effectively correcting an unintended consequence of ASU 2017-12.

Effective date and transition

ASU 2025-09 is effective for public business entities for annual reporting periods beginning after Dec. 15, 2026, and interim periods within those annual reporting periods. For all other entities, the amendments are effective for annual reporting periods beginning after Dec. 15, 2027, and interim periods within those annual reporting periods. Early adoption is permitted on any date on or after the issuance of the ASU.

The ASU is required to be adopted on a prospective basis. However, it provides a flexible transition approach under which entities must apply the guidance to new hedges but have the option to either continue using legacy guidance or transition to the new guidance for certain existing hedges. Additionally, in certain cases, entities may modify certain critical terms of existing cash flow hedging relationships without dedesignating the hedging relationship. The ASU also provides specific guidance on certain hedging relationships that were discontinued before the adoption date but have amounts reported in AOCI.

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