Renewable power purchase agreements: draft narrow-scope amendments to IFRS 9

Keywords: Mazars, Thailand, IFRS, Renewable Power Purchase, Green Power Agreements, Hedge Accounting

At its July 2023 meeting the IASB tentatively decided to add a project to the work plan regarding the treatment of renewable (“green”) power purchase agreements.

This issue was initially submitted to the IFRS Interpretations Committee (IFRS IC) in June 2023, but the committee did not wish to give an opinion and opted to refer the matter to the IASB.

This project reflects the growing use of these contracts by entities consuming electricity, not least with a view to reducing their carbon footprint. The aim is to clarify the feasibility of narrow-scope amendments to IFRS 9 concerning the transactions qualified as own-use as well as hedge accounting requirements. These amendments would bring consistency in the treatment of these transactions between the entities concerned, while improving the relevance of the disclosures to users of the financial statements.

In the case of transactions qualified as own-use, the project addresses contracts for the physical purchase of electricity that cannot be stored by the purchaser and thus must either be consumed or sold at its market price. The aim is to clarify the standard by recognising the purchase cost of these agreements over their term, as opposed to treating them as derivative financial instruments that must be remeasured at fair value through profit or loss.

As regards hedge accounting, the project addresses virtual power purchase agreements, or VPPA. A VPPA meets the definition given by the standard of a derivative instrument (swap) enabling the buyer and seller of renewable power to transform a variable market price into a fixed price. The aim is to facilitate the application of hedge accounting to these agreements, whose nominal value is variable because it depends on the quantity of electricity actually produced. Documenting these derivatives in a hedging relationship would prevent the effective portion of the derivative from being remeasured at fair value through profit or loss.