Our Financial Instruments team conducted a webinar on Accounting Insights for Purchase Power Agreements (PPAs) on 23 May 2024 to discuss the challenges and considerations in PPA accounting, the complexities of current standards, and the impact of proposed IFRS 9 amendments for renewable energy contracts.
Find some of the key takeaways from the webinar below.
You need to assess how the proposed amendments might affect you and your contracts and build your plan and readiness to shift to new disclosure requirements.
Key takeaways
Type of PPA
Power purchase agreements can take different forms and have different features. They could be in the nature of fixed volume contracts, pay-as-produced, pay-as-consumed.
They could be contracts between a generator and supplier, a supplier and customer or a generator and customer. They could be physical PPAs or virtual PPAs. They could be based on renewable or non-renewable energy.
Each of these characteristics including the market structure in which these PPAs are set up (for eg. gross pool or net pool electricity market) could result in different financial reporting considerations under IFRS®Accounting Standards/ IAS®Standards (“Accounting Standards”).
Appropriate accounting treatment
Some of the Accounting Standards that could apply to PPA contracts include IFRS 10: Consolidated Financial Statements, IFRS 11: Joint Arrangements, IFRS 16: Leases, IFRS 9: Financial Instruments, IFRS 13: Fair Value Measurement.
Financial reporting requirements for power purchase agreements (PPAs) require a detailed analysis of the facts and circumstances of each arrangement. Different aspects or a combination of different factors could result in a different accounting outcome.
Therefore, a careful analysis of each contract and each market is required to determine the appropriate accounting treatment for a PPA contract. Besides, one should also consider the financial reporting requirements for Renewable Energy Credits (RECs) that are often transferred as part of some PPAs.
Proposed amendments & disclosure requirements
In its Exposure Draft on Contracts for Renewable Electricity (proposed amendments to IFRS 9 and IFRS 7) published on 8 May 2024, the International Accounting Standards Board (IASB) are proposing amendments to the “own-use exemption” and hedge accounting requirements within IFRS 9.
The proposed amendments are narrowly scoped to specifically apply to renewable electricity contracts that meet the specified characteristics, aimed at tackling the challenges in accounting for these particular instruments.
The exposure draft also proposes additional disclosure requirements for these contracts under IFRS 7. The amendments are proposed to IFRS 9 and therefore, entities that apply IAS 39 will not benefit from these proposed amendments.
Timing of amendments
When dealing with proposed amendments and accounting changes for Renewable Electricity Contracts and PPAs, having plenty of time to consider options and what the implications might be for your financial performance is really important.
Key takeaways and next steps for Entities to prepare:
- Analyse all electricity contracts (their clauses and features) and the market structure to ascertain the appropriate accounting treatment for these contracts
- Evaluate whether any of the contracts are within the scope of the proposed amendments
- Assess the impact of the proposed amendments on the identified contracts
- Evaluate readiness to transition to new accounting and disclosure requirements and prepare a roadmap for transition
Get in touch
If you have any queries related to Power Purchase Agreements, please don't hesitate to contact our team below. We'd be delighted to hear from you.
Colm O'Neill
Partner, Head of Energy, Utilities & Telecoms
KPMG in Ireland
Francisco Jimenez
Principal, KPMG Financial Instruments Lead
KPMG in Ireland
Simone Aranha
Associate Director, Financial Instruments
KPMG in Ireland
Discover more in Energy, Utilities & Telecoms
The contents of this webpage are for information purpose only and does not constitute accounting advice for a specific transaction. A detailed analysis of the contract and applicable accounting requirements is necessary to ascertain appropriate accounting treatment for a PPA contract.
This publication contains copyright © material and trademarks of the IFRS® Foundation. All rights reserved. Reproduced by KPMG Ireland with the permission of the IFRS Foundation. Reproduction and use rights are strictly limited. For more information about the IFRS Foundation and rights to use its material please visit www.ifrs.org
Disclaimer: To the extent permitted by applicable law, the IASB, the ISSB and the IFRS Foundation expressly disclaims all liability howsoever arising from this publication or any translation thereof whether in contract, tort or otherwise (including, but not limited to, liability for any negligent act or omission) to any person in respect of any claims or losses of any nature including direct, indirect, incidental or consequential loss, punitive damages, penalties or costs.
Information contained in this publication does not constitute advice and should not be substituted for the services of an appropriately qualified professional.
IFRS®’, ‘IASB®’ and ‘IAS®’ are registered Trade Marks of the IFRS Foundation and are used by KPMG Ireland under licence subject to the terms and conditions contained therein. Please contact the IFRS Foundation for details of countries where its Trade Marks are in use and/or have been registered.