FASB issues ASU on hedge accounting improvements

On November 25, 2025, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2025-09, Derivatives and Hedging (Topic 815): Hedge Accounting Improvements (ASU 2025-09 or the ASU), to align hedge accounting more closely with the economics of an entity’s risk management activities.

Background

Stakeholders noted to the FASB that, in certain instances, it is challenging to apply hedge accounting for otherwise highly effective hedging relationships. This has resulted in less decision-useful information for investors. Stakeholders also identified areas of hedge accounting guidance that required updating to address the impact of global reference rate reform.

ASU 2025-09 addresses five issues intended to enable financial statements to better reflect certain hedging strategies by allowing entities to achieve and maintain hedge accounting for a greater number of highly effective economic hedges.

Main provisions

ASU 2025-09 affects the following types of hedges:

• Similar risk assessment for cash flow hedges. ASU 2025-09 broadens the set of hedged risks that may be combined within a group of individual forecasted transactions in a cash flow hedge. Specifically, it replaces the prior requirement that the transactions exhibit a shared risk exposure with a new requirement that they exhibit a similar risk exposure. Entities must evaluate whether the risks are similar both when the hedge is initiated and throughout the life of the hedging relationship. The ASU further explains that individual forecasted transactions may be viewed as having a similar risk exposure when the designated hedging derivative is highly effective in offsetting each of the risks in the group. Additionally, in certain circumstances, entities may use a qualitative approach on an ongoing basis to assess whether the group continues to meet the similar-risk criterion.

• Hedging forecasted interest payments on choose-your-rate debt instruments. ASU 2025-09 introduces a framework that enables entities to apply cash flow hedge accounting to forecasted interest payments on variable-rate borrowings whose contractual provisions permit the borrower to switch both the reference interest rate index and the interest-rate tenor (i.e., the reset interval) on which interest is calculated. These arrangements are commonly described as “choose-your-rate” debt. Under this model, the debt contract identifies the permissible alternative rate indexes and tenors that may be designated as the hedged risk throughout the hedge term without requiring discontinuation of hedge accounting. The model also allows entities to employ certain simplifying assumptions when evaluating the likelihood of the forecasted interest payments occurring and when performing hedge-effectiveness assessments. This guidance may be applied to existing, forecasted issuances of, and subsequent replacements of choose-your-rate debt. The ASU explicitly prohibits extending this approach by analogy to other fact patterns.

• Cash flow hedges of nonfinancial forecasted transactions. ASU 2025-09 broadens the situations in which entities may apply hedge accounting to forecasted purchases and sales of nonfinancial assets. Rather than requiring that a price component be contractually specified, when certain conditions are met, entities may designate hedge relationships for eligible components of forecasted spot transactions, forward transactions, and subcomponents of explicitly referenced components in a contract’s pricing formula. For a forecasted purchase or sale of a nonfinancial asset to qualify for hedge designation, the variable pricing element must satisfy the criteria for being clearly and closely related to the underlying nonfinancial asset, consistent with the requirements embedded in the existing normal purchases and normal sales scope exception.

• Net written options as hedging instruments. This ASU revises the hedge accounting requirements applicable to net written options so that the guidance better reflects structural differences that emerged between the loan and swap markets following the discontinuation of LIBOR. ASU 2025-09 removes the requirement to perform the net written option assessment for a compound derivative—consisting of a swap combined with a written option—when that compound instrument is designated as the hedging instrument in either a cash flow hedge or a fair value hedge of interest rate risk.

• Foreign-currency-denominated debt instrument as hedging instrument and hedged item (dual hedge). ASU 2025-09 removes the recognition and presentation mismatch that arises in a dual-hedge structure (i.e., when the same foreign-currency-denominated debt instrument is designated both as the hedging instrument in a net investment hedge and as the hedged item in a fair value hedge of interest rate risk). Under the new guidance, an entity must exclude the fair value hedge basis adjustment associated with that debt instrument from the net investment hedge effectiveness analysis. Consequently, any gains or losses resulting from remeasuring the fair value hedge basis adjustment at the spot exchange rate are recorded immediately in earnings. The ASU also prohibits applying this guidance by analogy to other situations.

Effective date

For public business entities (PBE), ASU 2025-09 is effective for annual reporting periods beginning after December 15, 2026, and interim periods within those annual reporting periods. For entities other than PBEs, the ASU is effective for annual reporting periods beginning after December 15, 2027, and interim periods within those annual reporting periods. Early adoption is permitted any date on or after its issuance.

Transition

Entities should apply the amendments in the ASU prospectively for all hedging relationships. An entity may elect to adopt the amendments in the ASU for hedging relationships that exist as of the date of adoption.

Upon adoption of the amendments, entities are permitted to modify certain critical terms of certain existing hedging relationships without dedesignating the hedge.