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IASB Proposes Key Changes to Renewable Energy Contract Accounting

renewable energy
 

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The IASB has proposed narrow-scope amendments to improve the accounting for renewable energy contracts. As entities increasingly use Power Purchase Agreements (PPAs) to source renewable electricity, these changes aim to address accounting challenges and enhance transparency.


About PPAs

Power Purchase Agreements (PPAs) are a key mechanism for procuring renewable energy. PPAs are typically long-term contracts, often ranging from 10 to 20 years, which provide financial stability and predictability for both providers and buyers. PPAs lock in electricity prices, protecting providers and buyers from market price volatility.


types of PPAs

Challenges in current practice

As mentioned above, PPAs provide increased financial stability and predictability for both providers and buyers. However, under current accounting practices, PPAs are often recognised as financial derivatives and fair valued through profit or loss. Additionally, the ‘own use’ exception in IFRS 9 and hedge accounting may not apply due to the unpredictable nature of renewable energy production and market mechanisms. Consequently, PPAs can cause significant profit or loss volatility in the financial statements of both renewable energy providers and buyers.


Proposed Amendments by IASB

The following amendments have been proposed by IASB to address the current accounting challenges on renewable energy PPAs:


Own Use Requirements:

  • Assess contracts based on purpose, design, and volume.

  • Sales of unused electricity would not breach the ‘own use’ exception if:

    • The sale occurs due to volume risk mismatches.

    • The market design limits control over timing and price.

    • The entity plans to purchase an equivalent volume soon after the sale.

 

Hedge Accounting Requirements:

  • Allow designating variable nominal volumes as hedged items under specific conditions.

  • Measure hedged items using the same assumptions as the hedging instrument.


Disclosure Requirements:

  • Disclose contract terms, conditions, and quantitative information.

  • For contracts not measured at fair value, disclose fair value or expected volume over the contract’s life.


Transition:

  • Own use’ amendments apply retrospectively without restating comparatives.

  • Hedge accounting amendments apply prospectively with specific transition rules.


Next Steps

The IASB’s exposure draft is open for comment until August 7, 2024, with final amendments expected by the end of 2024. An effective date will be set, with an option for early adoption.


These changes aim to provide clearer, more consistent accounting for renewable energy contracts, reflecting the evolving nature of the energy market.

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