Summary of research and possible approaches for narrow-scope standard setting (Agenda Paper 3)

In July 2023, the IASB decided to add a project to the work plan to research whether narrow-scope amendments could be made to IFRS 9 to address concerns about the accounting for power purchase agreements (PPAs). At this meeting, the staff provided the IASB with a summary of the research to date and an analysis of possible approaches to narrow-scope standard-setting.

The staff research was based on two questions: the prevalence of PPAs and whether the scope of any potential standard-setting could be sufficiently narrow.

The staff research confirmed that PPAs are being used by entities in almost all geographical regions and across many industries. Stakeholders confirmed that the type of PPAs that give rise to operational challenges with regards to the current accounting requirements, are increasingly being used for the long-term supply of power from renewable or green energy sources.

In terms of scope, the staff considered including an exception in IFRS 9 for PPAs, however the staff does not recommend this approach as there is a significant risk of unintended consequences.

Staff recommendations

Based on the findings of the research and other input received from stakeholders the staff recommended that the IASB:

• Undertake narrow-scope standard-setting to amend IFRS 9 to better reflect power purchase agreements in the financial statements with the next project milestone to be an exposure draft
• Explore an approach to this standard-setting that includes amending the ‘own use’ and hedge accounting requirements in IFRS 9

IASB discussion

Overall, IASB members were supportive of the staff paper and recommendations. They all agreed that providing an exemption in IFRS 9 for these contracts was not the right approach.  

There was some discussion around the difference between virtual PPAs (VPPAs) and PPAs. The staff confirmed the outcome of the two agreements was the same and they are in place for the same risk management purpose, however the economics behind them is different. PPAs are in place to fix the price and purchase power, whereas VPPAs are effectively a contract for the difference. Based on this, IASB members did not believe that the accounting for both agreements should be same. The staff confirmed that the use of both PPAs and VPPAs are growing. The staff highlighted that the questions for a producer of power will be different to the consumer of power and therefore there will not be one solution for all.

IASB members were positive about this project, however they did raise areas of caution. IASB members discussed that this project should be ringfenced and not disrupt existing practice. The staff noted that by amending the hedge accounting rules, it will likely impact other contracts. IASB members noted that this could benefit other hedge accounting discussions, including load following swaps, and that it is unfortunate that the timing does not work with the post-implementation review of the hedge accounting requirements.

There was some discussion about whether the staff could look at hedge accounting first, because if both VPPAs and PPAs qualify for hedge accounting, then the IASB do not need to alter the own use exemption. The majority of IASB members agreed with this approach, as if a contract qualifies for hedge accounting, it should also qualify for the own use exemption as own use contracts are essentially all-in-one hedges. However, some IASB members disagreed as these contracts are entered into for the purpose of consuming energy. Therefore the own use exemption should be considered first. The staff told the IASB that they will not be looking at the own use exemption and hedging accounting separately as they are interlinked and therefore will be considered together.

IASB members requested the staff to consider, at a later date, disclosures in this area. They requested transparency of the risks related to these contracts. These contracts are long dated and also it is known that approximately 20% of the power generated might need to be sold as it cannot be stored, which will result in volatility.  

One IASB member requested that the staff add a tainting rule to avoid any abuse of the requirements. For example, if energy prices increase and the entity sells the power to make a profit, the option of own use in the future would no longer be available.

The staff mentioned that they will come back to the IASB in January with some solutions, but more for educational purposes. After this they will come with proposals and then move to an exposure draft soon after. 

IASB decision

All IASB members voted in favour of the staff recommendation.