29/07/2024 - EFRAG issues final comment letter on the IASB ED Contracts for Renewable Electricity

​EFRAG has published its final comment letter (FCL) on the IASB's ED/2024/3 Contracts for Renewable Electricity, Proposed amendments to IFRS 9 and IFRS 7 (the 'ED'). 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.