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IASB floats amendments for renewable electricity contracts

Author: ICAEW Insights

Published: 23 May 2024

Rule changes aim to improve the relevance of financial statements on renewable electricity contracts, as more and more companies transition to clean power sources.

The International Accounting Standards Board (IASB) has proposed updates to rules governing the reporting of renewable electricity contracts to provide clearer information on their financial implications.

In a new exposure draft, the international standard setter proposes “narrow-scope amendments” to ensure that financial statements more faithfully reflect the cost impacts that renewable electricity contracts have on a company.

The proposals will affect IFRS 9 Financial Instruments and IFRS 7 Financial Instruments: Disclosures, and come in response to the rapidly growing global market for these contracts.

Contracts for renewable electricity can be structured in several ways and are often structured as either physical or virtual power purchase agreements. Some are structured as a normal purchase or a normal sale of renewable electricity. Others require net settlement of the difference between the prevailing market price and the contractually agreed price for the volume of electricity produced. 

And because the source of production of the renewable electricity is nature-dependent, the supply cannot be guaranteed at specified times or for specified volumes. 

Accounting challenges

The IASB says: “Renewable electricity contracts aim to secure the stability of and access to renewable electricity sources. However, renewable electricity markets have unique characteristics. Renewable electricity sources depend on nature and supply cannot be guaranteed. The contracts often require buyers to take and pay for whatever amount of electricity is produced, even if that amount does not match the buyer’s needs at the time of production.

“These distinct market characteristics have created accounting challenges in applying the current accounting requirements, especially for long-term contracts.”

With that in mind, the IASB proposes three, targeted changes to corporate accounting for contracts with specified characteristics. The proposals address how the ‘own-use’ requirements would apply; permit hedge accounting if specified criteria are met and add disclosure requirements to enable investors to understand the effects of these contracts on a company’s financial performance and future cash flows.

IASB chair Andreas Barckow says: “These targeted amendments aim to improve the relevance of financial statements when reporting on renewable electricity contracts. As more and more companies transition to renewable electricity sources, we want to make sure that our accounting standards keep pace and provide investors with useful information.”

Clean power buying

Corporate clean power buying grew 12% to a new record in 2023, according to the most recent Corporate Energy Market Outlook from BloombergNEF. Kyle Harrison, Head of Sustainability Research at BloombergNEF and lead author of the report, says: “It has never been easier to buy clean energy as a corporation. 

“For the first time, a variety of contracting structures are now widely available around the world to help companies decarbonise their energy consumption. These contracts are now the centrepiece in many companies’ sustainability strategies, rather than a nice-to-have.”

Georgina Chalk, Technical Manager in ICAEW’s Corporate Reporting Faculty, says: “ICAEW recognises the need to respond to the changing information needs arising from the growing prevalence of contracts for renewable electricity, and we support efforts to ensure the continued relevance of IFRS Accounting Standards. We are currently reviewing, and considering our feedback to, the proposed amendments.”

The consultation on the proposals is open until 7 August and the IASB aims to finalise any changes by the end of 2024.

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