error
Subscriptions are not available for this site while you are logged into your current account.
close
Skip to main content
Submit RFP

      Renewable Power Purchase Agreements (PPAs) play a crucial role in carbon mitigation but present significant accounting complexities.

      The IASB finalised the amendments to IFRS 9 and IFRS 7 in December 2024 to address the two main challenges companies face:

      • the application of own use exemption and
      • hedge accounting.

      These amendments will allow companies to better align the accounting treatment with their risk management strategy, therefore resulting in less Income Statement volatility.

      The amendments take effect from 1 January 2026, with early application permitted.

      What’s covered by the amendments?

      Stewart Hagell
      Stewart Hagell

      Partner, Corporate Treasury Services

      KPMG in the UK

      The amendments apply to contracts that expose entities to variability in electricity volumes due to uncontrollable natural conditions (e.g. weather).

      Most “pay as produced” power purchase agreements (PPAs) will fall in scope; however careful consideration needs to be given to whether the inclusion of additional terms or the existence of side letters excludes your contracts from the scope of the amendments.

      Own Use Exemption: Current challenges

      Demonstrating the criteria for the own-use exemption, which determines whether a contract is accounted for off balance sheet or as a derivative financial instrument measured at fair value, can be difficult for the following reasons:

      • Market structures vary by jurisdiction and delivery from a generator to an off taker is only considered to occur in net pool markets.
      • Even under a net pool mechanism, electricity cannot be stored for long periods like other commodities and requires unused volumes to be automatically resold to the grid at the prevailing market rate.

      Own Use Exemption: Impact of amendments

      A contract will meet the own-use exemption if the entity has:

      • No practical ability to avoid reselling unused electricity due to market structures. For example, where battery facilities might be available; and
      • Is a net purchaser of electricity i.e. it buys sufficient electricity to offset the sales of any unused electricity in the same market in which it sold the electricity within a reasonable timeframe (not exceeding 12 months).

      The amendments call for entities to monitor their consumption and sales of electricity on a more detailed level. However, it still leaves some scope for judgement over what a “reasonable” amount of time might be. Whilst entities might be tempted to the default 12 months, auditors could provide challenge based on the context of a company’s business model and the nature of the renewable energy source.

      Hedge Accounting: Current challenges

      Applying hedge accounting cannot mitigate all profit and loss volatility. The highly probable criterion for the hedge item typically requires a 90% probability threshold, which is represented by using P90 volume assumptions. However, PPAs are often fair valued using the median expected energy yield, which is represented by P50 volume assumptions.

      This means entities can only designate a portion of the hedging instrument, creating residual profit and loss volatility. Further, the variable nature of the notional value of the contract can create ineffectiveness when forecasts get revised subsequent to hedge designation.

      Hedge Accounting: Impact of amendments

      The amendments now allow entities to use P50 volume assumptions instead of the more conservative P90 assumptions for measuring the hedge item, reducing profit and loss volatility.

      For sellers this means they can now designate total forecast sales as hedged items, and the hedged item is presumed to be highly probable.

      For purchasers, there will still be some sources of ineffectiveness from basis risk (buying and consuming in different markets) and structural price differences (difference in timing of delivery and consumption of electricity), which will need to be modelled.

      Despite the significant benefits the amendments bring, they cannot be applied retrospectively to existing hedge relationships, meaning Finance teams need to weigh up the pros and cons of continuing the hedge with the current inefficiencies or applying the amendments and having the same difficulties as hedging with off-market derivatives.

      Enhanced Disclosures

      If a company applies the amendments, they will be required to provide quantitative and qualitative details about contractual features of their contracts to provide more transparency.

      Depending on how many contracts the amendments apply to, there could be a significant amount of additional reporting. Companies will need to be prepared for this, and ensure they have the data available to comply with the requirements.

      How KPMG can help

      KPMG provides comprehensive Treasury and Accounting Advisory Services to help businesses navigate the complexities of IFRS amendments and optimise their financial risk management strategies. Our offerings include:

      • Evaluating the potential to achieve own-use exemption or hedge accounting to minimise income statement volatility.
      • Running workshops to educate finance teams on the impacts of IFRS 9 amendments.
      • Drafting compliant hedge documentation to support designation under IFRS 9.
      • Assisting in meeting the new enhanced disclosure requirements.
      • Assisting with valuation methodology for PPAs and hypothetical derivatives when applying hedge accounting.
      • Assessing data requirements, system capabilities, and developing in-house valuation models.
      • Keep in touch by offering one-on-one periodic accounting and reporting updates.

      For further insights, contact our Corporate Treasury Services team.

      Our accounting and finance insights

      Something went wrong

      Oops!! Something went wrong, please try again
      MTD TEST

      Get in touch

      Discover why organisations across the UK trust KPMG to make the difference and how we can help you to do the same.

      Contact us