Economic benefits from use of a windfarm: IFRS IC agenda decision

Keywords: Mazars, Thailand, IFRS, IFRS IC, IFRS 16, IASB, Windfarm

28 February 2022

The fact pattern in the request submitted to the IFRS IC was as follows:

• the customer and the supplier are registered participants in an electricity market, in which customers and suppliers are unable to enter into contracts with one another directly. Instead, customers and suppliers make purchases and sales via the market’s electricity grid, at the spot price per megawatt, which is set by the market operator;
• the customer and the supplier enter into a 20-year agreement, which:
  • swaps the spot price per megawatt of electricity for a fixed price per megawatt of electricity, for the electricity the windfarm provides to the grid, and settles the difference in cash;
  • transfers all the renewable energy credits arising from use of the windfarm to the customer.

As a reminder, IFRS 16.9 states that, “a contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration”. To control the use of an identified asset, the customer must have both the right to obtain substantially all of the economic benefits from use of the identified asset, and the right to direct the use of the asset, throughout the period of use (IFRS 16 B9).

As a further reminder, IFRS 16 B21 states that, “a customer can obtain economic benefits from use of an asset directly or indirectly in many ways, such as by using, holding or sub-leasing the asset. The economic benefits from use of an asset include its primary output and by-products (including potential cash flows derived from these items), and other economic benefits from using the asset that could be realised from a commercial transaction with a third party.”

Regarding the fact pattern submitted in the request, the IFRS IC noted that:

• the economic benefits from use of the windfarm include the electricity produced (the primary output) and the renewable energy credits (a by-product or other economic benefit from use of the windfarm);
• it is true that the agreement results in the customer settling with the supplier the difference between the fixed price and the spot price per megawatt of electricity produced by the windfarm, throughout the term of the agreement, but it does not convey to the customer either the right or the obligation to obtain any of the electricity the windfarm produces and supplies to the grid;
• the agreement conveys to the customer the right to obtain the renewable energy credits, but does not convey the right to obtain substantially all the economic benefits from use of the windfarm, because it has no right to obtain the electricity produced by the windfarm throughout the term of the agreement.

The Committee therefore concluded that the customer does not have the right to obtain substantially all of the economic benefits arising from use of the windfarm and, as a result, the contract is not a lease under IFRS 16.

The IFRS IC felt that IFRSs already provide an adequate basis for assessing this situation, and thus decided not to add this issue to its work plan.

In its agenda decision, the Committee cited two previous agenda decisions on which it drew when reaching its conclusions:

• the agenda decision “Meaning of Delivery” (IFRS 9 – Financial Instruments, August 2005);
• and the agenda decision, “Application of the Highly Probable Requirement when a Specific Derivative is Designated as a Hedging Instrument” (IFRS 9 and IAS 39, March 2019), for entities applying hedge accounting.

The November IFRIC Update has not yet been modified to include the final agenda decision, which was ratified by the IASB in December.