Power Purchase Agreements

Project Background​

In July 2023, the IASB decided to add a project to its work plan to research whether narrow-scope amendments could be made to IFRS 9  to better reflect the effect of some 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 in IFRS 9 the ‘own use’ requirement for some physical PPAs and hedge accounting requirements for a set of PPAs including 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 proposed narrow-scope amendments to IFRS 9 and IFRS 7.

The Exposure Draft was 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 where 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 was 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 provided some comments and suggestions for the IASB to consider. 

Scope

EFRAG suggested 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 noted that the proposed scope was limited to contracts containing 'pay-as-produced' features; however, a wide variety of contracts contain 'pay-as-forecasted' and 'pay-as-nominated' features. EFRAG believed that contracts with the aforementioned features should not be scoped out of the proposed amendments. 

Own-use assessment

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

Hedge accounting requirements 

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

Disclosure requirements

EFRAG suggested that the proposed disclosure requirements should apply only to contracts within the scope of the ED qualifying for the own-use exception. Further, EFRAG recommended that the IASB reconsider the disclosure requirements outlined in paragraphs 42V of the ED as they where perceived as unsuitable. Instead, information related to the financial impact of the sale of unused volumes could 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 questioned whether the items of information requested in paragraphs 42U and 42V(a) of the ED was fit for the purpose of financial statements, as this information could 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; 
• making hedge accounting easier to achieve 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.