IASB redeliberates proposed amendments to IFRS 9 and IFRS 7 on contracts for renewable electricity

After examining a summary of feedback received (available here) in August, the IASB began redeliberating in September, considering the comments received on the scope of the amendments and the own-use classification. 

Scope  

Feedback on the “nature-dependent” aspect of the source of production included: 

• the relevance of the concepts of “renewable” energy and “nature-dependent” energy sources; 
• the impact of the producer’s ability to control the production of energy (e.g. by opening or closing a hydroelectric dam).  

Comments on the purchaser’s exposure to volume risk included: 

• the relevance of limiting the scope to “pay-as-produced” features when other contractual features, such as “pay-as-contracted” features, are also commonly used but do not involve limitation of the volume risk for the purchaser; 
• the impact of features such as caps or floors, which purchasers sometimes include in contracts; 
• the appropriate unit of account when transactions are carried out through market structures that involve intermediaries (aggregators, suppliers, etc.) or when the contract is accompanied by the delivery of renewable energy certificates. In this context, the IASB tentatively decided to finalise the amendments, subject to clarifying that contracts falling within the scope of the amendments: 
• reference electricity that is i) generated from nature-dependent sources and ii) whose quantity cannot be controlled by human intervention (according to the staff papers, contracts for renewable energy generated by a hydroelectric dam would fall outside the scope of the amendments, as production is regulated by human intervention); 
• can be settled net, through payment of the difference between the contractually agreed price and the market price (for VPPAs) or gross, through payment of the contractually agreed price (for physical PPAs); and 
• expose an entity to cash-flow variability that depends on the contracted amount of electricity generated from nature-dependent sources. 

Some aspects relating to volume risk were addressed in the context of the discussions on “own-use” classification. 

Finally, the term “nature-dependent electricity” (or NDE) may replace “renewable electricity” in the final text of the amendments, if the IASB follows the staff recommendation. 

Own-use classification 

Feedback focused on the following topics: 

• how the proposals interact with paragraphs 2.4 and 2.6 of IFRS 9; 
• the concept of an “oversized” contract; 
• the concept of a “reasonable time” and the appropriate referenced market when matching purchases and sales. 

The IASB tentatively decided to finalise the amendments on own-use requirements, clarifying how the rules introduced by the amendments interact with the current paragraphs 2.4 to 2.7 of IFRS 9. 

The rules introduced by the amendments require an entity to classify a contract as “own-use” if the following three criteria are met: 

• the contractual features expose the entity to the risk of taking delivery of more electricity than it requires in any delivery interval; 
• the design and operation of the market requires the entity to immediately resell the oversupply of electricity at the current market price; and 
• the entity is a net purchaser, i.e. it expects to buy enough electricity in the same referenced market to at least offset sales of any oversupply, within a reasonable time. 

This “reasonable time” shall be determined by taking account of i) the seasonality of the source of electricity and the entity’s business cycle, and ii) all reasonable and supportable information, including forward-looking information, at the date of the assessment. However, it may not exceed twelve months, either prospectively or retrospectively. 

At its upcoming meetings, the IASB will examine feedback received on the proposed amendments on hedge accounting, disclosures in the notes, and transition. The aim is to publish the final amendments by end-2024 (though they would not be endorsed by the European Union until 2025).