Dynamic Risk Management

The IASB met on 16 September 2024 to continue its discussions on the Dynamic Risk Management (DRM) model.

Disclosure requirements (Agenda Paper 4A)

The IASB tentatively decided to propose that an entity be required to provide information that enables users of financial statements to understand:

1. the entity’s interest rate risk management strategy and how it is used to manage repricing risk;
2. the effect of the entity’s interest rate risk management activities on the amount, timing and uncertainty of its future cash flows; and
3. the effect of the entity’s interest rate risk management activities on the statement of financial position and statement of profit or loss.

The IASB also tentatively decided to propose that an entity be required:

1. to disclose information relating to the application of the DRM model in a single note or in a separate section in the financial statements. An entity would be permitted to include information by cross-referencing from the financial statements to another statement, as long as that statement was available to users on the same terms and at the same time as the financial statement.
2. to apply the principles set out in paragraph 41 of IFRS 18 Presentation and Disclosure in Financial Statements when it decides the most appropriate way to aggregate information in its financial statements, including in the notes.

Risk management strategy

The IASB tentatively decided to propose that an entity be required:

1. to disclose information about its risk management strategy that enables users of financial statements to understand:
   1. how the entity’s exposure to repricing risk arises, including a description of the underlying financial assets and financial liabilities used to determine its current net open risk position (CNOP) and whether the entity’s repricing risk arises from fixed or floating rate exposures;
   2. the level at which the entity aggregates and manages its repricing risk;
   3. how the entity identifies, aggregates, monitors and manages its repricing risk, including which risk metrics it uses and how frequently its CNOP and risk mitigation intention are determined; and
   4. what the managed rate is, over which period the entity mitigates its repricing risk and (if the entity is allocating its risk exposures to repricing time periods) what repricing time periods the entity used; and
2. to provide a qualitative disclosure to explain how the entity manages its repricing risk, if the entity carries out risk management activities applicable to the DRM model but chooses not to apply the DRM model. Such disclosures would include:
   1. how the entity’s exposure to repricing risk arises;
   2. how the entity identifies, aggregates, monitors and manages its repricing risk; and
   3. how the entity reports its risk management activities in the financial statements.

Amount, timing and uncertainty of future cash flows

The IASB tentatively decided to propose that an entity be required:

1. to disclose qualitative and quantitative information on the terms and conditions of designated derivatives and how they affect the amount, timing and uncertainty of the entity’s future cash flows. To meet this requirement, an entity would be required to disclose:
   1. a profile of the timing of the nominal amount of the designated derivatives (for example, by the time periods in which they mature); and
   2. the average price or fixed rate of the designated derivatives.
2. to provide a sensitivity analysis showing how the net interest income or fair value of underlying items the entity used to determine its CNOP would change because of changes in interest rates that were reasonably possible at the reporting date.

Effects on financial position and performance

The IASB tentatively decided to propose that an entity be required:

1. to disclose in a table the items the entity used to determine its CNOP, including:
   1. the carrying amounts of the recognised financial assets and financial liabilities, or the notional amounts of yet-to-be-recognised future transactions;
   2. the line items in the statement of financial position containing the underlying items;
   3. qualitative disclosures about the inputs, assumptions and estimation techniques the entity used to determine the expected cash flows; and
   4. information about any included hedged exposures;
2. to disclose in a table information about the designated derivatives, including:
   1. the carrying amount of the designated derivatives;
   2. the line item in the statement of financial position containing the designated derivatives;
   3. the change in fair value of the designated derivatives used as the basis for measuring the DRM adjustment; and
   4. the nominal amounts of the designated derivatives;
3. to provide information about the performance of the DRM model, distinguishing between continuing and discontinued DRM models. An entity would be required to include:
   1. how the entity reflects the effect of unexpected changes in its CNOP during the period;
   2. the cumulative misalignment, the effect of misalignment in the current reporting period and the line items in profit or loss in which the misalignment is recognised; and
   3. the expected profile for recognising the DRM adjustment in profit or loss, based on the designated and benchmark derivatives (this profile represents future ‘protection’ against net interest income variability); and
4. to provide in a table a reconciliation from the opening balance to the closing balance of the DRM adjustment, distinguishing between continuing and discontinued DRM models, showing separately:
   1. the gains or losses (arising from changes in market interest rate) recognised as part of the DRM adjustment during the period;
   2. the amount of DRM adjustment recognised in profit or loss during the reporting period; and
   3. the amount of any reduction in the DRM adjustment recognised because of a capacity shortfall at the reporting date, and the expected effect on recognising the reduction in the DRM adjustment in profit or loss during the reporting period.

All 14 IASB members agreed with these decisions.  

Discontinuation of the DRM model (Agenda Paper 4B)

The IASB redeliberated the requirements setting out the circumstances under which an entity would be required to discontinue applying the DRM model, and how the entity would account for the discontinuation in its financial statements.

The IASB tentatively decided to propose that an entity be required:

1. to discontinue applying the DRM model if the entity’s risk management strategy changes—in other words, if the managed interest rate risk or how the entity manages that risk changes; and
2. to recognise the DRM adjustment in profit or loss over the risk management time horizon if the underlying items included in its CNOP continue to exist or future transactions are still expected to occur.

The IASB also tentatively decided that unless an entity changes its risk management strategy, it is not permitted:

1. to discontinue applying the DRM model;
2. to remove underlying items included in determining its CNOP when those items continue to meet the qualifying criteria; or
3. to de-designate a designated derivative.

All 14 IASB members agreed with these decisions.