Cover note (Agenda Paper 3)

Following the discussion with the IASB in January, the staff has undertaken outreach meetings with different groups of stakeholders, including the Accounting Standards Advisory Forum (ASAF).

As a reminder, power purchase agreements (PPAs) can be broadly grouped into physical PPAs and virtual PPAs. Under a physical PPA, the purchaser has a contractual obligation to gross settle the volume of electricity delivered under the contract. A virtual PPA is a contract for the settlement of the difference between the spot price and the contractually specified price without any obligation to take delivery of energy.

The key accounting challenges are how to apply the own use requirements in IFRS 9:2.4 to physical PPAs and how to designate PPAs as a hedging instrument in a cash flow hedge relationship.

The staff asked the IASB to consider the recommendations for proposals to include in an exposure draft (ED) and ask for permission to begin the process for balloting the ED.

No discussion was held on this paper as this was an overview paper.

Scope of the proposed amendments and the proposed amendments to the own-use requirements (Agenda Paper 3A)

This paper included the recommendations for the IASB to amend IFRS 9 to address the accounting challenges for PPAs in relation to scope of the proposed amendments and the own-use requirements.

Scope of the proposed amendments

The staff’s objective was to ensure that the scope is sufficiently narrow to minimise the potential for any unintended consequences and the time to finalise the proposed amendments.

To limit unintended consequences, the staff decided to limit the scope of the requirements from non-financial items to contracts for renewable electricity. In January 2024, the staff proposed that the scope of the amendments could be based on the following:

• The supply/production of the non-financial item is weather (and location) dependant such that the timing and/or volume of the item supplied are not necessarily aligned with the demand for the item;
• The purchaser cannot avoid taking delivery of the non-financial item when produced due to the legal structure of the market the non-financial item is transacted in; and
• The market structure requires that any quantities of the item that an entity is unable to use within a specified short period following delivery is put back into the market at the prevailing market rate at that point. For this purpose, the timing of any resulting sales is determined by the market structure and the entity has no control/discretion over the timing or price of resulting sales.

The staff believed these unique characteristics should still be used to define the contracts in scope of the amendments. These could also be used for contracts in scope of the hedge accounting amendments, with the exception of the final one, as this relates only to physical PPAs.

The IASB could also use the location of the requirements within IFRS 9 and IFRS 7 to communicate that the proposals do not apply to other contracts.

Staff recommendation

For the proposed scope of the project, the staff recommended that the scope of the proposed amendments to IFRS 9 is limited to contracts for renewable electricity for which:

• the source for production of the renewable electricity is nature-dependant such that supply cannot be guaranteed at particular times or in particular volumes. Examples are wind-, solar- and hydroelectricity; and
• volume (i.e. production) risk is substantially transferred to the purchaser, also referred to as pay-as-produced features. Volume risk is the risk that the timing or volumes of electricity supplied do not necessarily align with the purchaser’s demand.

The proposed amendments to the own-use requirements

The staff’s objective is that the proposed amendments need to achieve a ‘level playing field’ between physical PPAs and other contracts for non-financial items that are accounted for as a normal purchase by leveraging as much as possible on the characteristics that are unique to the PPAs.

Staff recommendations

For the purposes of applying the requirements in IFRS 9:2.4 (the own-use requirements) to a contract to purchase renewable electricity, the staff recommended that the IASB requires the purchaser to consider:

• the purpose, design and structure of the contract, and whether the volumes expected to be delivered under the contract continues to be consistent with the purchaser’s expected purchases or usage requirements for the remaining life of the contract; and
• the reasons of past sales of unused renewable electricity and whether such sales are consistent with the purchaser’s expected purchases or usage requirements. Sales would be consistent with the purchaser’s expected purchase or usage requirements if those sales arise from:
  • mismatches between the renewable electricity delivered and the purchaser’s demand requirements at the time of delivery; and
  • the design and operation of the market within which the renewable electricity is transacted in that prevents the purchaser from having the practical ability to determine the timing or price of such sales.

IASB discussion

Some IASB members agreed with the direction of the project and supported the ring-fencing of the PPA requirements. The change made from ‘weather-dependent’ to ‘nature-dependent’ was a key change based on feedback received and the other major point was that supply, in terms of timing and volume, cannot be guaranteed.

One comment was about the use of the word ‘transferred’ in the sentence ‘Volume risk is substantially transferred to the purchaser’. IASB members noted that the risk was not necessarily being transferred and the key feature was, instead, that the purchasers bear the volume risk, regardless of whether it is transferred or not.

One change made from the previous proposals was to move from a quantitative test to qualitative considerations. Whilst IASB members understood the reasons for this, they would prefer more rigour around the assessment of the sales. This could include providing what type of evidence might be required to show whether own use is met or not. It was noted that mismatches should not be caused by management actions. The staff also confirmed that once a contract has failed the reassessment of the own use requirements, they would not be allowed to do own use accounting.

In addition, further information should be provided around what is meant by purpose, design and structure of the contract.

IASB members asked to clarify in the scope that these amendments cannot be analogised. The staff confirmed that they would make this clear in the drafting.

Some IASB members did not agree with the amendments, as they believed this is an exception to an exception. They did not understand how these contracts are so different from other commodities that they require specific accounting.

One idea discussed was not to link the PPA requirements to the own use requirements and instead make them an exception of their own. The staff noted that this had been considered, but preparers understand the own use requirements and understand the discipline and strict requirement of own use, which would be lost if it was in a separate section.

Investors had said that fair value movements in the income statement were not useful, however one option could be to amend the presentation, rather than creating an accounting exception and to fair value these contracts on the balance sheet, with movements being taken to other comprehensive income. Another option was to apply cash flow hedge accounting to remove the fair value movements from the income statement but to still have these contracts at fair value on the balance sheet.

Some IASB members said that they understood the concerns but believed that it is worth exposing the recommendation, as the IASB needs to be seen to be responding to changes in the market and providing an option. These IASB members said it would be useful to understand stakeholder’s views.

IASB decision

13 of the 14 IASB members agreed with the staff recommendation on the scope.

12 IASB members agreed with the staff recommendation on own use, with the addition of more rigour around the sales.

Proposed amendments to the hedge accounting requirements (Agenda Paper 3B)

This paper provided the staff’s analysis and recommendations to amend the hedge accounting requirements of IFRS 9 with respect to a narrow population of contracts for renewable electricity with particular characteristics.

The challenge for achieving hedge accounting for contracts for renewable energy arise as unlike most other forecast transactions where cash flow variability only arises because of price uncertainty, in a contract for renewable electricity cash flow variability arises because of both price and volume uncertainty.

The proposed amendments are only relevant to the requirements in IFRS 9. No amendments are proposed to hedge accounting requirements in IAS 39.

Staff recommendation

The staff recommended that, when designating a cash flow hedging relationship in which a contract for renewable electricity is designated as a hedging instrument, an entity is permitted to designate as the hedged item a variable nominal volume/quantity of forecasted sales or purchases of renewable electricity if, and only if:

• the volume of the hedged item designated is specified as a proportion of the variable volume of the hedging instrument;
• the hedged item is measured using the same volume assumptions as those used for the hedging instrument. However, all other assumptions used for measuring the hedged item are reflective of the nature of the hedged item and not imputing the features of the hedging instrument (for example the pricing structure); and
• the designated forecasted sales or purchases of electricity are:
  • for a purchaser, highly probable if the entity has sufficient highly probable capacity that exceeds the estimated variable volume/quantity to be designated in the hedged item; or
  • for a seller, not required to be highly probable because the designated quantity of sales is certain to occur once produced.

IASB discussion

Overall, IASB members were supportive of the staff recommendation. One IASB member did not agree with the scope, as he believes that the solution would appeal to a number of different stakeholders for a variety of contracts. This may be raised again when conducting the post-implementation review of the IFRS 9 hedge accounting requirements.

One IASB member disagreed with the term ‘capacity’ that has been used in the recommendation as it could be misunderstood. The staff confirmed they would look for an alternative word.

IASB decision

All IASB members agreed with the staff recommendation.

Proposed disclosure and transition requirements (Agenda Paper 3C)

The purpose of this paper was to provide analysis and recommendations to the IASB in relation to IFRS 7 around proposed disclosures for contracts for renewable electricity and transition requirements.

Staff recommendation

For the proposed disclosures for contracts for renewable electricity, the staff recommends that the IASB requires an entity:

• as specific disclosure objectives, to disclose information that enable investors to assess the effects of the contracts within the scope of the proposed amendments:
  • on an entity’s financial performance; and
  • on the amount, timing and uncertainty of the entity’s future cash flows; and
• as items of information, to disclose for all its contracts for renewable electricity within the scope of the proposed amendments:
  • the terms and conditions of contracts—these terms and conditions are, for example, the term of the contract, the type of pricing including whether the contracts include price adjustment clauses, minimum or maximum quantities, cancellation clauses and whether the contracts include renewable energy certificates (RECs);
  • either the fair value of the contracts at the reporting date, including the information required by IFRS 13:93(g)–93(h), or the items of information listed below; and
  • if that entity does not disclose the fair value of its contracts for renewable electricity, then the entity should disclose the following for these contracts:
    • the total volume of renewable electricity sold or purchased under the contracts during the reporting period;
    • the average market/spot price per unit of electricity for the reporting period;
    • the volume of renewable electricity an entity expects to sell or purchase over the remaining term of the contracts—this information could be provided as a range for each of the following periods: not later than one year; later than one year and not later than five years and later than five years; and
    • the methods and assumptions used in preparing the analysis including information about changes from the previous period in the methods and assumptions used, and the reasons for such changes.

For the proposed disclosures for the forthcoming IFRS 19, the staff recommended that the IASB requires those entities:

• to disclose the terms and conditions of contracts for renewable electricity—these terms and conditions are, for example, the term of the contract, the type of pricing including whether the contracts include price adjustment clauses, minimum or maximum quantities, cancellation clauses and whether the contracts include RECs;
• to disclose either the fair value of the contracts accompanied by the information required by IFRS 19 for other assets or liabilities measured at a level 3 fair value, or the items of information listed in the next bullet;
• if that entity does not disclose the fair value of contracts, disclose for these contracts:
  • the total volume of renewable electricity sold or purchased under the contracts during the reporting period;
  • the average market/spot price per unit of electricity for the reporting period;
  • the volume of renewable electricity an entity expects to sell or purchase over the remaining term of the contracts—this information could be provided as a range for each of the following periods: not later than one year; later than one year and not later than five years and later than five years;
  • the methods and assumptions used in preparing the analysis, including information about changes from the previous period in the methods and assumptions used, and the reasons for such changes.

For the transition requirements the staff recommended that the IASB:

• require an entity to apply the proposed amendments to the own-use requirements retrospectively applying IAS 8, but the entity is not required to restate prior periods to the reflect the application of the proposed amendments;
• require an entity to apply the proposed amendments to the hedge-accounting requirements prospectively. However, during the annual reporting period in which an entity first applies the proposed amendments, an entity is permitted:
  • for hedging relationships that are already designated, to alter the designation of the hedged item—such alterations to the hedged item will not constitute the discontinuation of the hedging relationship; and
  • for potential hedging relationships that would have met the qualifying hedge accounting criteria if the proposed amendments had been available at that time, designate the hedging relationship from the date the criteria would have been met;
• require formal documentation of the hedging relationship is in place by the end of the reporting period in which the entity first applies the proposed amendments. For the avoidance of doubt, this means that an entity needs to have the required information available from the date on which the entity would be designating the hedging relationship; and
• permits early application of the proposed amendments.

IASB discussion

One IASB member noted that the disclosure requires the terms and conditions, which includes quantities and pricing of the contract. However, this does not include the impact of sales in the market and subsequent purchases. Therefore, the amount in the disclosures (i.e. a fixed amount per year) would not agree to the income statement (which would be variable due to sales and subsequent purchases) and therefore quantitative disclosures should be added to explain these differences.

Another suggestion raised was that some of the information that is required to be provided if fair value is not provided should be provided regardless (i.e. the total volume of renewable electricity sold or purchased under the contracts during the reporting period and the average market/spot price per unit of electricity for the reporting period). The staff confirmed that the recommendation will be amended, so that this information would be required whether the fair value is provided or not.

The IASB asked for the same suggestions to be included in the IFRS 19 disclosure requirements.

With regard to the transition requirements, the IASB suggested that the ED should ask about an effective date to understand feedback. After some debate, it was concluded that the proposed amendments will be available for early application once the final amendments are issued, but the ED will ask for feedback on an effective date to understand from preparers potential implementation time required.

IASB decision

All IASB members voted in favour of the staff recommendation, modified for the suggestions made during the meeting.

Due process requirements (Agenda Paper 3D)

The staff recommended a comment period of 90 days for the ED. This has been approved on 21 March 2024 by the Due Process Oversight Committee.

The staff asked the IASB if they agree with their recommendation, if any of the IASB members intend to dissent from the proposals in the ED and asked for permission to begin the process for balloting the ED.

IASB discussion

IASB members asked whether, due to the short comment period, the staff plan to do an educational website. The staff confirmed that they plan to do this.

IASB decisions

All members voted in favour of the staff recommendation on the comment period.

Two members noted that they intend to dissent.

All members gave permission to begin the balloting process.