Cover paper (Agenda Paper 12)

The objective of this session was to discuss the following maintenance and consistent application topics:

• Application of the ‘own use’ exception to some physical power purchase agreements—exploring possible narrow-scope amendments to IFRS 9
• IFRIC Update June 2023

Application of the ‘own use’ exception to some physical power purchase agreements—Exploring possible narrow scope amendments to IFRS 9 (Agenda Paper 12A)

In June 2023, the IFRS Interpretations Committee (IFRS IC) discussed a request about applying IFRS 9:2.4 to physical delivery contracts to buy renewable energy. The request stated that entities are experiencing application challenges and questions when applying the requirements in IFRS 9 particularly due to the unique characteristics of the renewable energy market and the related features of the long-term physical delivery contracts. The request included three fact patterns.

In analysing the fact patterns, the IFRS IC was of the view that the principles and requirements in IFRS 9 do not provide an adequate basis for an entity to determine the required accounting for some physical power purchase agreements (PPAs) in a consistent way. The IFRS IC specifically considered contracts for the purchase of a non-financial item when the underlying non-financial item cannot be stored and has to either be consumed or sold within a short time in accordance with the market structure in which the item is bought and sold.

The IFRS IC therefore recommended that the IASB consider undertaking a narrow-scope standard-setting project that addresses the application of the ‘own use’ exception in IFRS 9 to such PPAs. Outreach confirmed that similar questions arise regarding the accounting for virtual PPAs (VPPAs).

The purpose of this meeting was to:

• Provide the IASB with a summary of the IFRS IC discussions
• Consider what the scope and priority of a potential standard-setting project could be
• Ask whether the IASB agrees to adding a narrow-scope standard-setting project to the workplan

Staff recommendation

Based on the analysis in the agenda paper, the staff recommended that the scope of the narrow-scope standard-setting project explores:

• The application of the own use exception in IFRS 9 to physical PPAs for the purchase of renewable energy where the underlying non-financial item cannot be stored economically, and has to either be consumed or sold within a short time in accordance with the market structure in which the item is bought and sold
• The application of the hedge accounting requirements using VPPAs as the hedging instrument

The staff also recommended that the project is classified and added to the workplan as a high priority project.

IASB discussion

The staff began the discussion by clarifying that they were only requesting IASB approval to begin a research project with the plan to come back to the IASB in the future to decide on the project direction. The staff are looking to understand what the issues are in relation to physical PPAs and VPPAs and whether standard-setting is a possibility.

The Chair noted that there are various fact patterns and believe a research stage is needed to ensure all facts and circumstances are understood, so that this could be addressed in one attempt rather than a multi-stage exercise. He also requested that the staff look to see if and how this project could be ringfenced.  

The majority of IASB members agreed with the staff to explore this further. Some IASB members questioned whether this really was a high priority issue and whether it was pervasive with a material impact. They noted that no issues in relation to PPAs were raised in the IFRS 9 Classification and Measurement post-implementation review (PIR). The staff noted that due to recent circumstance these contracts are becoming more common. In countries where there is a net pool, PPAs are pervasive and in countries where there is a gross pool, VPPAs are pervasive. 

IASB members highlighted that if the staff propose, after the research project, to request approval for standard-setting, they should consider whether this is a narrow-scope change or whether this could be application guidance or interpretation guidance. Disclosures requirements should also be considered. In addition, consideration should be given to how any potential changes might impact utility companies and whether any standard-setting could have a knock-on impact on other non-financial instruments.

IASB members asked the staff whether, if they took on this research project, there would be an impact on the current work plan. The staff noted that as they have the capacity and resources, this will not impact any current projects they are working on, but it might impact the start date for the PIR of the hedge accounting requirements.

IASB members said it should be highlighted to stakeholders that this would be a longer-term project and it is unlikely a quick solution will be reached.

The Vice-Chair noted that the IASB should create a framework to enable the IASB to make decisions on whether projects should be added onto the work programme. This would help the IASB to be more systematic and transparent with stakeholders in their decision-making.

IASB decision

13 of the 14 IASB members voted in favour of the staff’s recommendations.

IFRIC Update June 2023 (Agenda Paper 12B)

This paper reproduced the June 2023 IFRIC Update. The IASB were given the opportunity to comment on the contents of the IFRIC Update.

IASB discussion

One IASB member commented on the topic of Consolidation of a Non-hyperinflationary Subsidiary by a Hyperinflationary Parent, noting that several countries are hyperinflationary and therefore this is a common issue.