Technical Alert - FASB ASU 2025-09

 

In November 2025, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2025-09, Derivatives and Hedging (Topic 815): Hedge Accounting Improvements. As is often the case with ASUs, the FASB issued this one to clarify certain guidance. In addition, the FASB wanted to update hedge accounting guidance to address the effects of the global reference rate reform initiative.

 

Guidance

 

The ASU affects the following types of hedges.

1. Similar Risk Assessment for Cash Flow Hedges.

 The amendments in ASU 2025-09 expand the hedged risks permitted to be aggregated in a group of individual forecasted transactions in a cash flow hedge by changing the requirement to designate a group of individual forecasted transactions from having a shared risk exposure to having a similar risk exposure. Entities are required to assess risk similarity both at hedge inception and on an ongoing basis. The amendments also clarify that a group of individual forecasted transactions can be considered to have a similar risk exposure if the derivative used as the hedging instrument is highly effective against each hedged risk in the group. In addition, in some cases, entities are permitted to perform an ongoing qualitative assessment of whether a group of individual forecasted transactions has a similar risk exposure.

   2. Hedging Forecasted Interest Payments on Choose-Your-Rate Debt Instruments

The amendments in ASU 2025-09 provide a model to facilitate the application of cash flow hedge accounting to forecasted interest payments on variable-rate debt instruments with contractual terms that permit the borrower to change the interest rate index and interest rate tenor (that is, reset frequency) upon which interest is accrued (commonly referred to as “choose-your-rate” debt instruments). Under the choose-your-rate debt model, the contractual terms of the debt agreement specify the alternative interest rate indexes and interest rate tenors that an entity may select as being hedged during the hedging relationship without discontinuing hedge accounting. When applying this model, an entity may use simplified assumptions to assess both the probability of forecasted transactions occurring and hedge effectiveness. An entity may apply this model to existing, forecasted issuances of, and subsequent replacements of choose-your-rate debt. Entities are prohibited from applying this guidance by analogy to other circumstances.

   3. Cash Flow Hedges of Nonfinancial Forecasted Transactions 

The amendments in ASU 2025-09 expand hedge accounting for 

• forecasted purchases and 

• sales of nonfinancial assets. 

Subject to meeting specific criteria, entities are permitted to apply hedge accounting for eligible components of forecasted spot-market transactions, forward-market transactions, and subcomponents of explicitly referenced components in an agreement’s pricing formula. To qualify for hedge designation, the variable price component of the forecasted purchase or sale of a nonfinancial asset is required to meet the criteria to be considered clearly and closely related to the nonfinancial asset being purchased or sold, as provided in the current normal purchases and normal sales scope exception.

   4. Net Written Options as Hedging Instruments 

The amendments in ASU 2025-09 on the use of net written options as hedging instruments update the hedge accounting guidance to accommodate differences in the loan and swap markets that developed after the cessation of the London Interbank Offered Rate. 

Specifically, the amendments eliminate the requirement to apply the net written option test to a compound derivative comprising a swap and a written option designated as the hedging instrument in a 

• cash flow hedge of interest rate risk 

• or a fair value hedge of interest rate risk. 

   5. Foreign-Currency-Denominated Debt Instrument as Hedging Instrument and Hedged Item (Dual Hedge) 

The amendments in ASU 2025-09 eliminate the recognition and presentation mismatch related to a dual hedge strategy.  A dual hedge strategy is, a hedge for which a foreign currency-denominated debt instrument is both designated 

• as the hedging instrument in a net investment hedge and 

• as the hedged item in a fair value hedge of interest rate risk. 

The amendments require that an entity exclude the debt instrument’s fair value hedge basis adjustment from the net investment hedge effectiveness assessment. As a result, an entity immediately recognizes in earnings the gains and losses from the remeasurement of the debt instrument’s fair value hedge basis adjustment at the spot exchange rate. 

Note: entities are prohibited from applying this guidance by analogy to other circumstances. 

The amendments improve GAAP by enabling entities that utilize dual hedging strategies to reflect the economic offset of changes attributable to both 

• interest rate risk and 

• foreign exchange risk.

Effective date

ASU 2025-09 is effective:

• For public business entities (PBE), for annual reporting periods beginning after December 15, 2026, and interim periods within those annual reporting periods. 

• For entities other than PBEs, 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.

(ASC 815-20-65-7a through 65-7c)

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. (ASC 815-20-65-7d)

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