Power Purchase Agreements

The IASB met on 18 March 2024 to discuss:

• amendments to IFRS 9 Financial Instruments, IFRS 7 Financial Instruments: Disclosures and the prospective IFRS Accounting Standard Subsidiaries without Public Accountability: Disclosures (prospective Subsidiaries Standard) on power purchase agreements the IASB expects to propose in the prospective Exposure Draft Contracts for Renewable Electricity (PPA Exposure Draft); and
• the due process steps—including permission to begin the balloting process—for the PPA Exposure Draft.

Scope of the Exposure Draft Contracts for Renewable Electricity and the proposed amendments to the own-use requirements (Agenda Paper 3A)

Scope of the PPA Exposure Draft

The IASB tentatively decided to limit the scope of the PPA Exposure Draft to ‘contracts for renewable electricity’ that are contracts for which:

1. the source for production of the renewable electricity is nature-dependent so that supply cannot be guaranteed at particular times or in particular volumes. Examples of sources include wind-, solar- and hydroelectricity.
2. the purchaser is exposed to substantially all of the volume risk under the contract through pay-as-produced features. Volume risk is the risk that the volume of electricity produced does not coincide with the purchaser’s demand at the time of production. 

Thirteen of 14 IASB members agreed with this decision.

Proposed amendments to the own-use requirements

To apply the own-use requirements in paragraph 2.4 of IFRS 9 to such contracts for renewable electricity, the IASB tentatively decided to propose that, from the contract’s inception and throughout its duration, the purchaser under the contract be required to consider:

1. the purpose, design and structure of the contract, and whether the volume expected to be delivered under the contract continues to be consistent with the entity’s expected purchase or usage requirements for the remaining duration of the contract.
2. the reasons for past and expected sales of unused renewable electricity and whether such sales are consistent with the entity’s expected purchase or usage requirements. A sale is consistent with the entity’s expected purchase or usage requirements if:
   1. the sale arises from mismatches between the renewable electricity delivered and the entity’s demand at the time of delivery.
   2. the design and operation of the market in which the renewable electricity is traded restricts the entity from having the practical ability to determine the timing or price of such sales.
   3. the entity expects to repurchase the sold volumes of renewable electricity within a reasonable time after the sale.

Twelve of 14 IASB members agreed with these decisions.

Proposed amendments to the hedge-accounting requirements (Agenda Paper 3B)

The IASB tentatively decided—for cash-flow-hedging relationships in which a contract for renewable electricity within the scope of the proposed amendments is designated as a hedging instrument—to propose that an entity be permitted to designate as the hedged item a variable nominal volume (or quantity) of forecasted sales or purchases of renewable electricity only if:

1. the volume of the hedged item is specified as a proportion of the hedging instrument’s variable volume.
2. the hedged item is measured using the same volume assumptions used for the hedging instrument. (All other assumptions used for measuring the hedged item reflect the nature of the hedged item and do not impute the features of the hedging instrument, such as the pricing structure.)
3. the designated forecasted sales or purchases of electricity are:
   1. for purchasers—highly probable if the entity has sufficient highly probable forecasted purchases that exceed the estimated variable volume (or quantity) to be designated by the entity as the hedged item.
   2. for sellers—not required to be highly probable because the designated quantity of sales is certain to be hedged if it occurs.

All 14 IASB members agreed with these decisions.

Proposed disclosure and transition requirements (Agenda Paper 3C)

General disclosures

The IASB tentatively decided to propose setting specific disclosure objectives that would require an entity to disclose information that enables users of financial statements to assess the effects of contracts for renewable electricity on:

1. the entity’s financial performance; and
2. the amount, timing and uncertainty of the entity’s future cash flows.

The IASB also tentatively decided to propose that an entity be required to disclose—as items of information for all its contracts for renewable electricity:

1. the terms and conditions of contracts. For example, the contracts’ duration, type of pricing (including whether they include price adjustment clauses), minimum or maximum quantities, cancellation clauses and whether they include Renewable Energy Credits (RECs).
2. the net volume purchased or the total volume for which amounts were net-settled for the reporting period, and an explanation of any significant variances in the volume. These entities are also required to disclose the average market price per unit of electricity for the reporting period.
3. either the fair value of the contracts at the reporting date accompanied by the information required by paragraph 93(g)–(h) of IFRS 13 Fair Value Measurement, or:
   1. the volume of renewable electricity the entity expects to sell or purchase over the remaining duration of the contracts. This information could be provided as a range for each of the following periods: not later than one year; later than one year and not later than five years; and later than five years.
   2. the methods and assumptions used in preparing the analysis in (i), including information about changes in those methods and assumptions from the previous period and the reasons for such changes.

All 14 IASB members agreed with these decisions.

Entities applying the prospective IFRS Accounting Standard Subsidiaries without Public Accountability: Disclosures

The IASB tentatively decided to propose that an entity within the scope of the prospective Subsidiaries Standard be required to disclose for all its contracts for renewable electricity:

1. the terms and conditions of contracts. For example, the contracts’ duration, type of pricing (including whether they include price adjustment clauses), minimum or maximum quantities, cancellation clauses and whether they include RECs.
2. the net volume purchased or the total volume for which amounts were net-settled for the reporting period, and an explanation of any significant variances in the volume. These entities are also required to disclose the average market price per unit of electricity for the period.
3. either the fair value of the contracts at the reporting date accompanied by the information required by the prospective Subsidiaries Standard for assets and liabilities measured as Level 3 fair value, or:
   1. the volume of renewable electricity the entity expects to sell or purchase over the remaining duration of the contracts. This information could be provided as a range for each of the following periods: not later than one year; later than one year and not later than five years; and later than five years.
   2. the methods and assumptions used in preparing the analysis in (i), including information about changes in those methods and assumptions from the previous period and the reasons for such changes.

All 14 IASB members agreed with these decisions.

Transition

The IASB tentatively decided to propose that an entity be required to apply the proposed amendments:

1. retrospectively for own-use requirements, in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors, but not to require the entity to restate prior periods to the reflect the application of the proposed amendments.
2. prospectively for the hedge-accounting requirements. However, during the annual reporting period in which an entity first applies the proposed amendments, the entity would be permitted to alter the designation of hedged items in already-designated cash hedging relationships. Such alterations would not discontinue the hedging relationship.

The IASB also tentatively decided:

1. to exempt an entity from disclosing, for the current period and for each prior period presented, the quantitative information required by paragraph 28(f) of IAS 8;
2. to permit early application of the proposed amendments from the date the final amendments are issued and require an entity that applies the amendments early to disclose that fact; and
3. to provide no transition relief for first-time adopters.

All 14 IASB members agreed with these decisions.

Due process requirements (Agenda Paper 3D)

The IASB discussed the due process steps for the proposed amendments.

All 14 IASB members confirmed they were satisfied the IASB has complied with the applicable due process requirements and has undertaken sufficient consultation and analysis to begin the process for balloting the PPA Exposure Draft.

Two IASB members indicated an intention to dissent from the proposals in the PPA Exposure Draft.