“If you think IFRS 7 and 9 are hard enough, it’s going to get [harder],” said Merina Abu Tahir, who also sits on several boards of Malaysian public-listed companies including national utilities firm Tenaga Nasional. “They’re making amendments to [rules affecting] financial instruments.”
IFRS 7 outlines what assets or contracts companies should disclose in their financial statements, while IFRS 9 governs how a company’s assets and contracts should be classified and measured.
“[Renewable electricity] contracts often require buyers to take and pay for whatever amount of electricity is produced, even if that amount does not match the buyer’s needs at the time of production. These distinct market characteristics have created accounting challenges in applying the current accounting requirements, especially for long-term contracts,” it said.
The proposed amendments aim to ensure that financial statements “more faithfully reflect the effects that renewable electricity contracts have on a company,” it said, given increasing global demand for such contracts.
Specifically, IFRS 9 is being tweaked to address how ‘own-ruse requirements’ for renewable electricity contracts should apply and would allow hedge accounting if such contracts are used as hedging instruments.
The proposed amendments apply to renewable electricity contracts when the source of energy is nature-dependent and the contract exposes the purchaser to substantially “all the volume risk … through ‘pay-as-produced’ features”, said global accounting giant EY, in a report. Volume risk occurs when companies may have entered contracts to pay for high volumes of electricity produced via solar, wind or hydropower, even if not all of it ends up being used.
At the same time, disclosure requirements would be added under IFRS 7 to enable investors to understand the effects of these renewable electricity contracts on the company’s financial performance and future cash flows, said the IASB.
“The IASB intended the scope of the proposed amendments to be narrow enough to minimise the risk of unintended consequences,” said EY. It noted that the proposed amendments do not cover the accounting for renewables energy certificates (RECs).
Understanding the changes
Under the current rules, ‘own-use requirements’ allow companies to make an exception in accounting for non-financial items that are used for a company’s “expected purchase, sale or usage requirements”.
When it comes to renewable electricity, however, unused electricity might be sold to the grid if it is not stored. “The sale appears to breach the own-use requirement,” explained Aaron Saw, head of corporate reporting insights – financial at ACCA.
“If an entity uses the electricity in its operations, recognising fair value changes in profit or loss for these contracts does not provide useful information [to users of financial statements] about the performance of the entity,” Saw told Eco-Business. “Instead, an entity should account for these contracts in the same way as other procurement contracts.”
While some effort will be required early on to apply the proposed amendments, particularly in terms of the hedge accounting requirements, the amendments are ultimately aimed at reducing the accounting burden on companies preparing their financial statements, he said.
The IASB’s proposed amendments are an urgent response to stakeholders’ request for clarity and extra guidance in applying the own-use requirements to power purchase agreements. This is especially as more companies are expected to enter into contracts for the purchase of renewable electricity, said Saw.
Due to this urgency, the IASB shortened its comment period for the exposure draft from 120 days to 90 days. It is currently inviting public feedback on the exposure draft until August 2024 and aims to finalise changes by the end of this year.
Saw explained that because of the narrow and urgent scope of the proposed amendments for renewable electricity contracts, the shorter comment period is provided for under the IASB’s due process handbook.
“However, a shortened comment period should not become a trend as stakeholders need time to consider the practicality of proposals. Some of which are complex and the effects could be far-reaching as the IASB is setting standards for the world,” he said. Over 140 jurisdictions around the world require the use of the IFRS’ accounting standards.
For now, accounting professionals should ensure they are familiar with the proposed amendments for renewable electricity contracts and respond to the IASB’s exposure draft, said ACCA’s Merina.
Financial statements affected
Merina also stressed that accounting professionals should pay greater attention to how new…
Read More: Proposed IFRS amendments set to change how companies account for renewable