Background

In June 2023, the IFRS Interpretations Committee (IFRS IC) discussed a request about applying IFRS 9 to physical delivery contracts to buy renewable energy. The IFRS IC concluded 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 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 agreements. Outreach confirmed that similar questions arise regarding the accounting for virtual power purchase agreements.

The IASB took up a project and decided to propose amendments to IFRS 9 and IFRS 7 for contracts to buy or sell renewable electricity that have specified characteristics.

Suggested changes

The proposed amendments in exposure draft IASB/ED/2024/3 Contracts for Renewable Electricity (Proposed amendments to IFRS 9 and IFRS 7) are:

Proposed amendments to IFRS 9

The IASB proposes to amend:

• the own-use requirements in IFRS 9 to include the factors an entity is required to consider when applying IFRS 9:2.4 to contracts to buy and take delivery of renewable electricity for which the source of production of the electricity is nature-dependent and the purchaser is exposed to substantially all of the volume risk; and
• the hedge accounting requirements in IFRS 9 to permit an entity using a contract for renewable electricity with specified characteristics as a hedging instrument:
  • to designate a variable volume of forecast electricity transactions as the hedged item if specified criteria are met; and
  • to measure the hedged item using the same volume assumptions as those used for the hedging instrument.

Proposed amendments to IFRS 7 and IFRS 19

The IASB proposes to amend IFRS 7 and the forthcoming IFRS 19 Subsidiaries without Public Accountability: Disclosures to introduce disclosure requirements about contracts for renewable electricity with specified characteristics.

Comments on the proposed changes are requested by 7 August 2024.

Note: In an additional meeting on 21 March 2024, the Due Process Oversight Committee discussed a possible shortened comment period for the exposure draft in view of the urgency of the matter and agreed to a comment period of 90 days.

Effective date and transition

The exposure draft does not specify an effective date for the amendments but asks respondents whether an effective date for annual reporting periods beginning on or after 1 January 2025 would be appropriate — early application of the proposed amendments would be permitted from the date the amendments are issued. Entities would be required to apply the amendments to the own-use requirements in IFRS 9 using a modified retrospective approach and the amendments to the hedge accounting requirements prospectively.

Alternative views

Two IASB members voted against the publication of the exposure draft. In particular, these IASB members are of the opinion that:

• fair value accounting is appropriate (i.e. no exception should be introduced) if the purchaser of renewable electricity knows with reasonable certainty that for some periods during the contract the electricity delivered under the contract will not be used, but instead will be sold;
• the proposed amendments raises questions the accounting for other electricity contracts and contracts for other non-financial items, and appears more lenient towards contracts for renewable electricity; and
• if the IASB believes that the recognition of changes in fair value of contracts for renewable electricity with particular characteristics in profit or loss does not provide useful information, this  should have been addressed through presentation.

One of these IASB members also disagreed with the scope of the amendments to hedge accounting. In this member’s opinion, there is no principle-based reason as to why an entity should be allowed to designate the variable nominal amount of a contract for renewable electricity in a hedging relationship, whilst being prevented to do so for other contracts with similar economics.

Additional information

Please click for:

• IASB press release
• Access to the exposure draft on the IFRS Foundation website
• IASB webcast introducing the proposals
• Our UK Accounting Plus project page on Power purchase agreements
• Our related Need to know publication