Power Purchase Agreement Ifrs Accounting

Companies must determine whether a corporate AAE falls within the scope of derivative accounting in accordance with GAAP, IFRS or both standards. U.S. GAAP defines a derivative contract as a financial instrument or other contract with all the following characteristics: AAAs generally have three of the four characteristics mentioned above, so the accounting assessment depends on whether the contract has a fictitious amount. Often, these contracts can be structured so that there is no reliable fictitious amount. As a result, Corporate PPAs often escape US-GAAP derivative accounting, with no contractual or minimum volumes specified in the contract. The energy market is facing new changes: producers and large consumers are currently preparing for financing for the first wind farms to expire at the end of 2020 and price controls to be completed. However, since even without government assistance, producers need revenue security to make the necessary investments in wind farms, other mechanisms will be needed in the future to allow energy sources to bring wind to market. Power purchase contracts (AAEs) – long-term direct purchase contracts with large customers – are a possible solution. Such agreements are currently considerably popular, although there are legal and accounting challenges with regard to their design, including for green electricity customers. Accounting challenges arising from contracts to purchase electricity for the calculation of wind energy derivatives require that the contract be recorded on the balance sheet on the basis of the fair value of the contract. Unless hedging accounting is retained, changes in the fair value of the derivative instrument are recorded in the result in the event of a change.

Assessing the fair value of derivative contracts can be a challenge and the change in fair value could be a significant source of earnings volatility. As part of their sustainable development strategies, companies around the world are entering into power purchase contracts (PPPs) with renewable energy producers. This document should help to solve the problems related to the accounting of PPAs for renewable energy in companies. In this regard, the accounting of AAEs is not an option, but a consequence of the specific contractual provisions. PpA therefore offers industrial companies a good opportunity to source long-term and reliably with the green electricity requested. However, the impact on accounting and, indirectly, on risk information should be reviewed in a full timely manner. First, the AAE must be reviewed to determine whether or not it meets all the characteristics of an embedded derivative. A controversial point in this context could be considered a criterion for contract performance on the basis of a “subliminal” value, since the final purchase volume is often only fully measured after actual production.

Of course, it is not possible to accurately predict this volume for a wind farm, so an appropriate determination of the volume of the contract in the past has generally been considered unmet. However, IFRS 9 contains implementation guidelines (IFRS 9.IG. B.8), which now contain an example in which the amount of a derivative is not determined from the outset.