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IFRS Dynamic Risk Management (DRM)

Over the past few years, the International Accounting Standards Board (IASB) has made considerable progress with its Dynamic Risk Management project. Ahead of an expected exposure draft in 2025, now is the time for banks and building societies to be considering what this might mean for their business.

DRM: All you need to know

DRM in brief

  • The IASB's Dynamic Risk Management (DRM) project represents the development of a new accounting standard to replace the existing requirements of IAS 39 on portfolio hedge accounting.
  • The DRM model provides for a significantly stronger interaction between asset/liability and internal risk management.
  • Important amendments include the addition of risk limits derived from the risk management strategy along with the balancing of fair value changes and net interest income of derivatives through a new balance sheet position “DRM adjustment”.
  • The transition from IAS 39 portfolio hedge accounting to the DRM framework will require considerable work and collaboration across multiple functions of an organisation in order to ensure that the new model is implemented correctly.
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“The DRM model is likely to have a significant impact on how banks apply hedge accounting and therefore should be in the scope of every bank trying to manage their profit and loss volatility through the application of hedge accounting.”

Alex Armstrong, Partner Corporate Treasury

How will the proposed DRM model work?

A period of prioritisation

The DRM model still foresees repricing periods in the form of pre-defined hedge periods and follows a sequential approach. In contrast to hedge accounting under IAS 39 or IFRS 9, no de-designation at the end of the hedge period and (re)designation at the beginning of the subsequent hedge period is required due to the nature of the current net open risk position.

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Six substages

The process model for DRM can be divided into six sub-stages, which in turn can be sub-divided into process steps performed at the beginning (prospective assessment) and end of the hedge period (retrospective assessment).

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Comparison with Benchmarks

The mechanics of the DRM model are determined by comparing the designated derivatives with hypothetical benchmark derivatives. They represent the optimal hedge in terms of risk mitigation intention and are constructed with a fixed ruleset from “building block” on-market derivatives.

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DRM adjustment calculation

For the calculation of the DRM adjustment, the fair value changes of the benchmark derivatives and the designated derivatives are determined based on the “lower-of” test.

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An overview of the DRM framework

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"The DRM model is likely to have a significant impact on the way in which financial institutions apply hedge accounting and should therefore be very firmly on the agenda of those organisations intending to manage P&L volatility using hedge accounting strategies".

- Alex Armstrong, Partner Treasury Assurance

How can Deloitte support?

  • Knowledge exchange: Continuous information exchange with our experienced specialists on the mechanism and innovations of DRM
  • Implementation support: Identification of data, process and methodology gaps and derivation of optimisation measures
  • DRM simulation: Simulation of potential balance sheet and P&L effects calculated by the Deloitte DRM simulation tool.
  • DRM roadmap: Joint development of a governance structure and roadmap for a potential DRM preliminary study
  • Management analysis: Evaluation of different steering and control approaches and derivation of implementation requirements

Our thinking

Corporate Treasury

In today's ever-changing business environment, the Treasury function plays a pivotal role in managing financial risk and driving business strategy. From complex market conditions to increasingly stringent regulatory and reporting requirements, Treasurers are managing a greater number of risks and uncertainties than ever before.
Service

IASB Dynamic Risk Management Project

The International Accounting Standards Board (“IASB”) has made considerable progress over the last two years with its Dynamic Risk Management (“DRM”) project and is planning to issue an exposure draft in 2025.

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Awards and recognition

Get in touch

Alex Armstrong

Partner
+44 (0)14 1304 6991

Vitor Hugo Alves Gomes

Director
+44 (0)77 1608 0713