The European Securities and Markets Authority (ESMA) has just published the joint European focus areas for the upcoming audit season. It is hardly surprising that the topic of power purchase agreements (PPAs) is once again in the spotlight. PPAs are a much discussed topic at the moment, as companies are increasingly looking to switch their electricity supply to renewable energies. PPAs come in various forms, with the renewable electricity primarily being in the form of solar or wind power (onshore or offshore). In most cases, the contractual volume is determined by agreements such as "pay as contracted", "pay as generated" or "pay as consumed", while the price agreement can be either "fixed" or "variable". Since these agreements are usually entered into for a very long term, they are becoming increasingly important.

Following ESMA's rather vague requirements in relation to PPAs for the 2022 annual financial statements, which initially simply called for companies to be transparent about the accounting treatment of existing PPAs, it is now further specifying this requirement for the upcoming annual financial statements.

Companies will be required to provide information on the contractually agreed amount of energy, the targets and the term of the contracts. It is also necessary to disclose the price conditions contained therein. Beyond this, the accounting method applied must be disclosed. For example, part of these contracts are to be classified as derivatives at fair value with all fluctuations in value recognized in profit or loss in accordance with IFRS 9. Other contracts may fall under the exemption for own use in accordance with IFRS 9.2.4 and are therefore accounted for as pending transactions. It is also possible that a lease may be accounted for in accordance with IFRS 16. For this reason, ESMA initially requires disclosures on PPAs irrespective of the accounting method applied.

PPAs and their accounting have been a matter of concern for companies a while now, as the recognition of a large proportion of these contracts at fair value in the balance sheet with unplannable fluctuations in the income statement has a considerable impact on the company's annual reports and forecasting ability. Against this background, it is interesting to note that the IASB decided in July of this year to include a project on this in its work plan. See our initial findings in our August newsletter (No. 135)

It would be wise for companies to prepare for the upcoming audit season in good time and ensure that they can make all the necessary disclosures on PPAs properly.

Source: KPMG Corporate Treasury News, Edition 138, November 2023
Ralph Schilling, CFA, Partner, Head of Finance and Treasury Management, Treasury Accounting & Commodity Trading, KPMG AG
Andrea Monthofer, Senior Managerin, Finance and Treasury Management, Treasury Accounting & Commodity Trading, KPMG AG