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      Background

      The International Accounting Standards Board (IASB) issued targeted Amendments (“the Amendments”) to IFRS 9 Financial Instruments and IFRS 7 Financial Instruments: Disclosures in December 2024 to address accounting challenges arising from contracts referencing nature-dependent electricity (NDE), such as renewable power purchase agreements (PPAs).

      The Amendments responded to the growing prevalence of contracts linked to renewable energy sources like wind and solar, where electricity generation depends on uncontrollable natural conditions.

      The Amendments are effective for annual reporting periods beginning on or after 1 January 2026, with early application permitted. The Amendments were endorsed by the European Union on 30 June 2025.

      In this article, we discuss steps that can be taken by Entities to ensure they are prepared for the transition.

      Simone Aranha
      Simone Aranha

      Associate Director

      KPMG in Ireland

      1. Identification of NDE contracts that are in scope of the Amendments

      Entities should review their power purchase agreement contracts to ascertain if they fall within the scope of the Amendments.

      The narrow scope Amendments are targeted towards contracts referencing nature-dependent electricity that expose an Entity to variability in the underlying amount of electricity because the source of electricity generation depends on uncontrollable natural conditions (for example, the weather).

      These include both contracts to buy or sell nature-dependent electricity and derivatives that reference such electricity.

      Contracts referencing nature dependent electricity that would fall within the scope of the Amendments are contracts with the following characteristics:

      • Contracts that expose the Entity to variability in the underlying amount of electricity

        For example, the quantity delivered or referenced is uncertain and influenced by external factors. This would therefore exclude contracts with fixed quantities.


        For instance, a contract to purchase 1,000 MWh of electricity at a fixed price over a specified period. Even if market prices fluctuate or demand changes, the quantity (1,000 MWh) is predetermined and does not vary based on external factors.


        Therefore, this contract does not expose the Entity to variability in the underlying quantity.

      • Source

        Source of electricity generation depend on uncontrollable natural conditions such  as wind, sunlight, or hydrological flows, which directly affect generation capacity and output.

      • Contracts and derivatives

        Include both contracts to buy or sell nature dependent electricity as well as derivatives that reference such electricity i.e. both physical and virtual power purchase agreements are included.

      2. Evaluate physical delivery and qualification for own-use exemption

      NDE contracts that involve the physical delivery of electricity should be evaluated to determine whether they qualify for the own-use exemption under IFRS 9, as amended.

      Entities must first examine the structure and functioning of the electricity markets in which they operate to establish whether actual physical delivery of electricity occurs. After completing this market-level analysis entities should assess their individual NDE contracts.

      The Amendments significantly expanded the circumstances under which NDE contracts could be considered to be held for the entity’s expected usage requirements.

      It is also important to note that virtual power purchase agreements (VPPAs) will never qualify for the own-use exemption.

      Where entities conclude that, under the revised requirements, they now qualify to apply the own-use exemption, they should document and support their conclusions that they continue to be a net purchaser of electricity over the contract period.

      An entity is a net purchaser of electricity if it buys sufficient electricity to offset the sales of any unused electricity in the same market in which it sold the electricity.

      Entities would need to put in place reasonable and supportable documentation based on information about their past, current and expected future electricity transactions over a reasonable amount of time.

      The entity identifies ‘a reasonable amount of time’ by considering the variability in the amount of electricity expected to be generated due to the seasonal cycle of the natural conditions and the variability in the entity’s demand for electricity due to its operating cycle.

      In determining whether the entity has been a net purchaser, ‘a reasonable amount of time’ shall not exceed 12 months.

      3. Document assessments and prepare for transition

      After evaluating own-use qualification, entities should formally document all assessments to ensure transparency and audit readiness. This includes maintaining clear records of the criteria applied, judgments made, understanding of the market and supporting evidence for each contract classification.

      Documentation should cover the rationale for determining whether a contract qualifies for own-use exemption or qualifies for derivative accounting.

      Entities should also evaluate the transition requirements for any of the contracts that would be impacted by the Amendment and prepare for such transition.

      4. Review application of hedge accounting

      For all derivative PPA contracts, entities should evaluate whether there are additional benefits from applying hedge accounting as per the Amendments.

      The Amendments may allow more flexibility in designation of variable volumes or better alignment with risk management strategies, reducing ineffectiveness and volatility in profit or loss.

      Entities should analyse whether re-designation under the Amendments could simplify hedge documentation, improve hedge effectiveness, or streamline the compliance with highly probable criteria for forecast transactions.

      This assessment should also consider potential costs associated with updates to the hedge designation, ineffectiveness that may arise due to off-market designation and additional disclosure implications under IFRS 7. 

      5. Prepare documentation and assess hedge effectiveness

      (for new and re-designated hedges)

      For existing and new contracts where hedge accounting is applied in accordance with the Amendments, entities should review their formal documentation and hedge effectiveness testing to ensure they are in accordance with the Amendments.

      The hedge documentation could be reviewed for the definition of the hedged item to capture characteristics such as the variable nominal amount of nature-dependent electricity expected to be delivered by the generation facility as referenced in the hedging instrument.

      Additionally, the assessment of highly probable criteria should be documented. 

      6. Prepare disclosure for NDE contracts

      Entities must ensure compliance with the additional disclosure requirements under IFRS 7 for all NDE contracts within scope.

      The Amendments propose additional disclosure requirements for contracts qualifying for the own-use exemptions and where hedge accounting is applied.

      Such disclosures include information about contractual features, unrecognised commitments arising from such contracts, effects on the financial performance, etc. 

      Entities should plan for the disclosure requirements to ensure the ability to generate accurate information for such disclosures. 

      Get in touch 

      The Amendments to IFRS 9 and IFRS 7 mark a significant step toward aligning accounting practices with the realities of renewable energy markets.

      By clearly identifying contracts within scope, assessing physical delivery arrangements, and documenting own-use evaluations, entities can ensure compliance and reduce volatility in financial reporting. With the effective date of 1 January 2026 approaching, proactive planning and robust documentation are essential to manage transition requirements and maintain transparency.

      Early action will not only support accurate reporting but also strengthen confidence among stakeholders.

      If you have any queries, please get in touch with Simone Aranha of our Financial Instruments team.

      We welcome the opportunity to discuss your requirements to find the appropriate solution for you. We look forward to hearing from you.

      Simone Aranha
      Simone Aranha

      Associate Director

      KPMG in Ireland

      Jorge Fernandez Revilla
      Jorge Fernandez Revilla

      Partner, Head of Asset Management

      KPMG in Ireland

      Cristian Reyes
      Cristian Reyes

      Partner, Asset Management Audit, Head of Structured Finance

      KPMG in Ireland

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      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.

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