Power Purchase Agreements

Project Background​

In July 2023, the IASB decided to add a project to its work plan to research whether feasible narrow-scope amendments to IFRS 9  to better reflect the effect of Power Purchase Agreements (PPAs) on the financial statements.

In December 2023, based on the outcome of the IASB Staff research, the IASB tentatively decided to:

• to undertake narrow-scope standard-setting to amend IFRS 9 Financial Instruments, with the next project milestone to be an exposure draft; and
• to explore an approach to this standard-setting that includes amending the ‘own use’ and hedge accounting requirements in IFRS 9 for both physical PPAs and virtual PPAs.

Exposure Draft

On 8 May 2024 the International Accounting Standards Board (IASB) published for public comment the Exposure Draft Contracts for Renewable Electricity (Here), which proposes narrow-scope amendments to IFRS 9 and IFRS 7.

The Exposure Draft is open for comments until 7 August 2024.

Draft Comment Letter

On 13 June 2024 EFRAG issued its draft comment letter ('DCL'),  welcoming IASB's efforts and approach addressing both own-use exception requirements as well as hedge accounting requirements. 

Several specific questions on the topics covered in the ED are addressed to the constituents. The consultation on EFRAG's DCL was open until 15 July 2024 and the comment letters received can be viewed within the Documents section of the project page here. 

Final Comment Letter

Following the consultation on the draft comment letter, EFRAG's final comment letter was issued on 31 July 2024 and can be found here. 

In the context of the European Green Deal and related policies, regulations and legislations, an increasing number of entities are entering into Power Purchase Agreements, EFRAG understands the urgency and prevalence of the matter that the IASB intends to address through the proposed amendments to IFRS 9 Financial Instruments and IFRS 7 Financial Instruments: Disclosures and supports the IASB in this task.

EFRAG is supportive of the direction of the IASB’s proposals geared towards a narrow-scope application, addressing both own-use exception requirements as well as hedge accounting requirements.

However, EFRAG provides some comments and suggestions for the IASB to consider. 

Scope

EFRAG suggests clarifying the considerations when assessing the exposure to substantially all volume risk, considering market structure and contract features such as volume caps and/or floors. Furthermore, EFRAG notes that the proposed scope is currently limited to contracts containing 'pay-as-produced' features; however, a wide variety of contracts contain 'pay-as-forecasted' and 'pay-as-nominated' features. EFRAG believes that contracts with the aforementioned features should not be scoped out of the proposed amendments. 

Own-use assessment

EFRAG agrees with the considerations when assessing if the contracted electricity purchases are consistent with an entity's expected purchase or usage requirements. However, EFRAG notes that the example of one month is too restrictive and suggests capping the time period to a maximum of 12 months to account for seasonality.

Hedge accounting requirements 

EFRAG suggests providing guidance for the assessment by a purchaser of the 'highly probable' criterion considering the long duration of contracts.

Disclosure requirements

EFRAG suggests that the proposed disclosure requirements should apply only to contracts within the scope of the ED qualifying for the own-use exception. Further, EFRAG recommends that the IASB reconsider the disclosure requirements outlined in paragraphs 42V of the ED as they are perceived as unsuitable. Instead, information related to the financial impact of the sale of unused volumes may help enable users to understand how the contracts in the scope of the ED affect the purchaser's financial performance for the reporting period. EFRAG also questions whether the items of information requested in paragraphs 42U and 42V(a) of the ED are fit for the purpose of financial statements, as this information may be better placed in the sustainability report. 

More details on EFRAG's recommendations to the IASB can be found in EFRAG's final comment letter here.

Publication of the Amendments and Endorsement Consultation

On 18 December 2024 the IASB published Contracts Referencing Nature-dependent Electricity - Amendments to IFRS 9 and IFRS 7. The targeted amendments include: 

• clarifying the application of the 'own-use' requirements; 
• permitting hedge accounting if these contracts are used as hedging instruments; and
  
• adding new disclosure requirements to enable investors to understand the effect of these contracts on a company's financial performance and cash flows.