In July 2023, the IASB added a project to its work plan to research whether narrow-scope amendments to IFRS 9 could be made to better reflect how financial statements are affected by purchase power agreements (PPAs) (both physical and virtual). The project team has conducted further research on prevalence of PPAs and how to restrict the scope of any potential standard-setting solution to limit the risk of unintended consequences for other contracts or transactions to purchase non-financial items. As part of the research, the IASB seeks IFRS IC members’ input into the additional research performed.

In the agenda paper, summary of research findings in respect of prevalence, business strategies and risk management—producers, business strategies and risk management—consumers, scope of, and approach to, potential narrow-scope standard-setting has been presented to the IFRS IC. The questions to the IFRS IC are as follows:

• Do IFRS IC members consider the following characteristics to be appropriate and adequate to restrict the scope of a potential standard-setting project:
  • Neither the seller nor the purchaser controls the timing and volumes of power produced. Production could be sporadic and unpredictable over longer periods
  • The entity’s usage or sales expectations can be reliably predicted over a period of time that is shorter than the contractual period but not at the discrete points when the energy is delivered
  • If electricity is produced and the purchaser is unable to use the volume supplied, it is forced to sell unused volumes into market at the prevailing market rate (no control over the timing or the price of sales, which could be unfavourable)

Are there any other characteristics that IFRS IC members would suggest and why?

• If the IASB were to undertake any standard-setting, which of the following approaches would achieve the most appropriate outcome while limiting the risk of unintended consequences, and why? Are there any other options you think we should explore?
  • Option 1: Amend the ‘own-use’ requirements in IFRS 9: Include guidance on how to assess ‘own-use’ requirements in of IFRS 9:2.4 for non-financial items with certain characteristics. For example, assessment could consider the purpose and reasons for entering into the contract; changes in initial expectations about the frequency and volume of transactions with market; evidence of actual vs. expected usage (i.e. whether in a net buyer position); indications of trading intent/profit-driven sales
  • Option 2: Amend hedge accounting requirements in IFRS 9: Include guidance on how to assesses the requirement for a forecast transaction to be ‘highly probable’ for non-financial items with characteristics described in the agenda paper that will enable virtual PPA to be designated as hedging instrument. Assessment of highly probable shares mainly similarities with assessment for own use
  • Option 3: Exception for PPAs: An exception for PPAs could be created to exclude them from either the definition of derivatives and/or the scope of IFRS 9 entirely

IFRS IC discussion

IFRS IC members made valuable contributions to the project.

A few IFRS IC members considered that IFRS 9 has clear principles on how to determine whether the contracts meet the own use exception and how they should be accounted for. These kinds of contracts are not uncommon. One of which are energy contracts which have been prevalent for a long time. The market is changing and some different circumstances arise, but the IFRS IC members said that the principles in IFRS 9 can still be applied to them. However, many stakeholders did not like the consequence that IFRS 9 applies. They were of the view that standard-setting is not required and did not favour any of the proposed approaches. An IFRS IC member shared the same view but understood why this issue is brought into discussion.

The staff explained that PPAs are different from other commodity contracts, and they have specific characteristics, i.e. not being able to be stored and the sale of them is “forced”. This is because if entities cannot use the power at the time it is produced, they have to sell it. The remaining IFRS IC members agreed with the staff that PPAs are different and there is an urgent need to resolve their accounting. These IFRS IC members had different views on the options to explore.

One IFRS IC member said that short term contracts that create a mismatch with the usage are a common issue such as in wind and solar power generation. This was incredibly unpredictable, according to the IFRS IC member. He questioned why the discussion only focused on long-term contracts and he was of the view that long-term would be more predictable on average. The staff responded that the average output over long-term contract could be predicted but entities do not know the specificity on how much and at what time (for a point in time recognition).

Some IFRS IC members considered physical and virtual PPAs should be addressed together. There is no choice for some markets for entities to choose whether entering into physical or virtual PPAs for certain types of power. It would be unfair to leave the virtual ones unattended. Nonetheless, a number of IFRS IC members said that the accounting of virtual PPAs is different from that of physical PPAs. Addressing them together would delay the progress of determining the appropriate accounting treatment for each type of contract.

Many IFRS IC members agreed that Option 1 is an ideal option because it is a principles-based approach which fits with what the IFRS Accounting Standards are currently based on. However, some of them were of the view that this approach would be the most time consuming one and not cost effective.

Some IFRS IC members were supportive of Option 2. One of them said that it is not easy to prove “highly probable” if hedging were to apply and recommended that the IASB provide guidance on that. He said the business model test in IFRS 9 would be useful to be introduced to the hedging of PPAs and a threshold could be added. If entities know how much they are going to use, that portion could be hedged. This would reflect the economics of the market more.

There was one IFRS IC member who said it would be ideal if Options 1 and 2 could be combined, i.e. hedging should be allowed for physical PPAs that fail Option 1.

For Option 3, some IFRS IC members said that they did not support it because it excludes all PPAs without assessing consumption or usage. However, most IFRS IC members favoured this option because they thought it is the quickest way to resolve this urgent matter and to give direction to entities who enter into such kind of PPA. Some of those that supported the option suggested not exempting all PPAs but only those with certain characteristics. A few of them suggested requiring entities to disclose PPAs when they are temporarily scoped out of IFRS 9. Another IFRS IC member suggested Option 3 could be temporary and the IASB could develop more principles-based requirements when the temporary exception is in place for a period of time.

The Chair said entities should apply the principle-based standards to their PPAs. The accounting outcome should be the consequence but not the driver of whether an entity decides to enter into the contract. However, he agreed that it is worthwhile to see what can be done to address unfavorable outcomes for this issue.