IASB publishes final amendments to IFRS 9 and IFRS 7 on contracts referencing nature-dependent electricity (PPAs and VPPAs)

This follows analysis of the feedback received in response to the Exposure Draft published in May 2024 and redeliberations carried out in the second half of the year.  

In this special feature, we present the content of the new amendments.  

Scope  

The amendments cover “contracts referencing nature-dependent electricity”, or NDE. This phrase has replaced “contracts for renewable electricity”, which was the terminology used in the May 2024 exposure draft. Stakeholders felt that the previous phrase was unclear and vague.  

NDE contracts reference electricity that is subject to variability in the amounts produced as it is dependent on uncontrollable natural conditions, such as electricity generated from wind or solar energy. Thus, electricity generated from biomass or waste recycling does not fall within the scope of the amendments, as the natural resources can be stored, granting control over the source of electricity generation (BC2.17G).  

The amendments cover: 

• contracts to buy or sell electricity that will be settled by physical delivery (Power Purchase Agreements or PPAs); 
• swaps that are settled by a net payment in cash of the difference between the contractual fixed price and the variable market price (Virtual PPAs or VPPAs), which are financial instruments. 

The amendments specify that an entity may not apply the specific provisions of the amendments on own-use and hedge accounting by analogy to other contracts (IFRS 9 2.3B). 

Own-use classification 

Readers will remember that IFRS 9 includes an exception for contracts that were entered into and continue to be held for the purpose of the receipt or delivery of a non-financial item in accordance with the entity’s expected purchase, sale or usage requirements (the so-called “own-use” exception). 

In the amendments, classification as “own-use” from the buyer’s point of view would be subject the following three conditions, considered at date of initial recognition of the contract and at each subsequent reporting date: 

• the contractual features expose the entity to the risk of taking delivery of more electricity than it requires in any delivery interval. This condition is met even if i) the risk of intermittent overproduction is inherent in the nature of the contract and known from the start (BC2.18A); and ii) the producer takes on part of the volume risk through caps or floors (BC2.18D); 
• in practice, the design and operation of the market require the entity to immediately resell the excess electricity on the market; and 
• the entity is a net purchaser over the contract period, i.e. it buys back or expects to buy back enough electricity to at least offset sales of any excess, within a reasonable amount of time. “A reasonable amount of time” shall be determined by considering i) the seasonality of the source of electricity and the entity’s business cycle, and ii) all reasonable and supportable information, whether past, current, or forward-looking, that is available at the date of the assessment. It may not exceed 12 months. When determining whether it is a net purchaser, the entity shall consider electricity purchased on the same market, which implies that an entity could offset frequent overproduction by one site with underproduction by another site on the same market (BC2.18I). 

Hedge accounting  

The amendments relate to the definition of a hedged item when designating a cash flow hedging relationship (CFH). In this relationship, the hedging instrument is an NDE contract classified as a derivative, either by its nature (VPPA) or because it is a physical PPA that does not qualify as own-use (“failed own-use”) and is designated in an all-in-one cash flow hedge. 

The amendments stipulate that: 

• the hedged item may include a variable nominal amount equal to the variable amount of nature-dependent electricity produced by the generation facility referenced in the hedging instrument; 
• the other hedge accounting requirements of IFRS 9 remain unchanged for these contracts.  

Further details on the impacts and practical application of this change in the hedge accounting requirements for these contracts are provided in the Basis for Conclusions (BC6.661 to 6.683):  

• applying the “highly probable” criterion in the context of a CFH: for an electricity buyer, this criterion is deemed to be met even if the contract covers a very long period (e.g. 25 years, cf. BC6.672); for an electricity seller (or a buyer in the context of an all-in-one hedge), this criterion is deemed to be systematically met by nature or design regardless of the quantity of electricity produced, as the cash flows in the contingent hedging relationship are perfectly matched by the hedged cash flows (BC6.674); 
• measuring the hypothetical derivative: this is an exception to the principle that the characteristics of the hypothetical derivative should not simply mirror those of the hedging derivative. However, this applies only to the nominal amount of the derivative, which should be equal to the variable amount of electricity produced by the facility referenced by the contingent hedging derivative (BC6.676 / 6.681). As a result, any remaining sources of hedge ineffectiveness must be identified and quantified, such as price differences resulting from the timing of production and consumption, or from the use of two geographically different reference markets (BC6.677). 
• introducing an exception to the principle set out in the March 2019 IFRS IC agenda decision on load following swaps, which states that it is not possible to designate a hedged item as a variable nominal amount, as the future cash flows to be hedged cannot be accurately specified or demonstrated to be highly probable (BC6.662). However, the agenda decision remains in force for other types of contingent hedging relationship (such as certain currency hedges), as the amendments cannot be applied by analogy to other situations.  

Finally, a new illustrative example has been added to the standard to illustrate how hedge accounting should be applied to NDE contracts (Example 19 – IFRS 9 – IE 148 to 159). 

Disclosures required in the notes 

The proposed disclosure requirements are intended to enable users of financial statements to understand the effects of contracts for renewable electricity on the amount, timing and uncertainty of the entity’s future cash flows. 

For own-use PPAs, an entity shall provide the following disclosures in a single note: 

• contractual features that expose the entity to the risk of intermittency (variability depending on the amount of electricity produced by the nature-dependent source) and volume risk (the risk of oversupply of electricity); 
• information about unrecognised commitments at the reporting date: 
• the expected cash flows from buying electricity, aggregated into appropriate time bands; 
• qualitative disclosures about how the entity manages the risk that a contract will become onerous (as defined in IAS 37), including the methods and assumptions used; 
• qualitative and quantitative information on how the entity determines whether it is a net purchaser for the reporting period, and more specifically: 
• the costs arising from purchases of electricity, distinguishing between the used and unused portions; 
• the proceeds arising from sales of unused electricity; 
• the costs arising from subsequent purchases of electricity made to offset sales of unused electricity. 

For derivatives designated in hedging relationships, an entity shall present separately the disclosures required by paragraph 23A of IFRS 7, i.e. the contractual features and how they affect the amount, timing and uncertainty of the entity’s future cash flows.  

Lastly, if an entity that buys electricity discloses information about other contracts within the scope of the amendments (such as VPPAs designated in hedging relationships) in other notes in its financial statements, it must include cross-references to those notes in the required single note. 

Effective application and transition 

Entities are required to apply the proposed amendments as follows: 

• retrospectively for the own-use requirements, in accordance with IAS 8, but without requiring the entity to present restated comparative information for prior periods. The assessment of whether the own-use exception applies shall be carried out based on the facts and circumstances at the date of initial application of the amendments (not the date when the contract was signed). As a result, the impacts of the amendments will thus be recognised in opening retained earnings for the first period of application. Moreover, at the date of initial application, an entity has the option of designating contracts that were previously classified as derivatives and reclassified as ownuse under the amendments as measured at fair value through profit or loss (applying IFRS 9 para. 2.5); 
• prospectively for the hedge accounting requirements. The amendments permit an entity to discontinue an existing hedging relationship in order to designate a new hedging relationship applying the amendments, which could result in hedge ineffectiveness arising from the non-zero value of pre-existing hedging derivatives at the date of initial application (BC7.109).  

Finally, entities are exempt from disclosing, for the current period and for each prior period presented, the quantitative information required by paragraph 28(f) of IAS 8. 

The amendments are mandatory for annual reporting periods beginning on or after 1 January 2026. Early application is permitted, subject to adoption by the European Union.