Exposure Draft and comment letters: Contracts for Renewable Electricity

On 8 May 2024 the International Accounting Standards Board (IASB) published for public comment the Exposure Draft Contracts for Renewable Electricity. The Exposure Draft proposes narrow-scope amendments to ensure that financial statements more faithfully reflect the effects that renewable electricity contracts have on a company. The proposals amend IFRS 9 Financial Instruments and IFRS 7 Financial Instruments: Disclosures. The IASB’s swift action responds to the rapidly growing global market for these contracts.

Renewable electricity contracts¹ aim to secure the stability of and access to renewable electricity sources. However, renewable electricity markets have unique characteristics. Renewable electricity sources depend on nature and its supply cannot be guaranteed. The contracts often require buyers to take and pay for whatever amount of electricity is produced, even if that amount does not match the buyer’s needs at the time of production. These distinct market characteristics have created accounting challenges in applying the current accounting requirements, especially for long-term contracts.

To address these challenges, the IASB is proposing some targeted changes to the accounting for contracts with specified characteristics. The proposals would:

• address how the ‘own-use’ requirements would apply;
• permit hedge accounting if these contracts are used as hedging instruments; and
• add disclosure requirements to enable investors to understand the effects of these contracts on a company’s financial performance and future cash flows.

The IASB is inviting feedback on the proposed amendments until 7 August 2024. Recognising the urgent need for these amendments, the IASB has shortened the comment period to 90 days from the standard 120 days.

The IASB aims to finalise any changes by the end of 2024. It also proposes making the new requirements available for companies to apply as soon as possible after they are finalised.

¹Contracts for renewable electricity are often structured as power purchase agreements (PPAs). They are grouped as either physical PPAs or virtual PPAs.