ifrs accounting outline for power purchase agreements · leases (ifrs 16) instead of ias 17 —...

POWER PurchaseaGreeMeNTs

IFRS accounting outline for

IFrs accouNTING ouTlINe For PoweR PuRchaSe agReementS 2

1. Introduction 4

2. application of accounting guidance for power purchase agreements 7

a. Decision tree 8

B.Clarificationandadditionalguidancerelatingthequestionsinthedecisiontree 9

3. accounting impact 19

A.Accountforthecontractasalease 21

B.Accountforthewholecontractasaderivativeoraccountforanembeddedderivativeinthecontractseparately(IFRS9) 23

C.AccountforaPPAasa“normal”executorycontract(IAS37) 24

D.ConsolidatetheprojectentityandeliminateintercompanyPPA 25

E.Recognizeassets/liabilitiesandeliminatethePPA 25

F.Accountfortheprojectentitybasedontheequitymethod 26

G.Accountforprojectentityasafinancialinstrument(IFRS9) 26

Content

IFrs accouNTING ouTlINe For PoweR PuRchaSe agReementS 3 IFrs accouNTING ouTlINe For PoweR PuRchaSe agReementS 3


1. IntroductionAspartoftheirsustainabilitystrategies,companiesacrosstheglobeareenteringintopowerpurchaseagreements(PPAs)withrenewableenergygenerators.ThispaperaimstohelpaddressissuessurroundingaccountingforcorporaterenewablePPAs.Companiesacrosstheglobeareevaluatingtheirimpactontheenvironment.Aspartoftheirsustainabilitystrategies,theyarestrivingtoreducetheirgreenhousegasemissions.Becausetechnologyisevolvingandrenewableenergyisbecomingmorecostcompetitive,thedecarbonizationofelectricityisanachievablegoal.Onewaytobuyrenewablepowerisbyenteringintocorporatepowerpurchaseagreements(PPAs)directlywithrenewableenergygenerators.CorporaterenewablePPAsarecontractsthatcontainthecommercialtermsofthepurchaseofrenewableenergy,suchasthecontractperiod,pointofdelivery,deliverydate/times,volume,priceandproduct.Inadditiontofulfillingsustainabilitygoals,companiesarealsoenteringintocorporatePPAsforeconomicandbrandingreasons.PPAsareeconomicallyattractivebecausetheyoftencontainpre-agreedpricesforaperiodoftime,whichlimitsexposuretopowerpricevariability,whiledirectsourcingfromrenewableproducersensureslong-termenergycostaffordability.

PPAscanalsostrengthenacompany’sbrandsincecivilsocietyrecognizesrenewableenergyachievements.Fromtheperspectiveofthegenerator(whichisoftenaprojectentitythatisestablishedspecificallyforthedevelopmentandoperationofrenewablepowerproductionfacilities),corporatePPAsarenecessarytoensuringthelong-termandstablerevenuestreamneededtomakenewinvestmentsviable.CorporatePPAsareoftenextensivecontractsandincludeamyriadofclausesandadvancedpricemechanismsthatcanincreaseaccountingandfinancialreportingcomplexity.CompaniesusuallyprefertoconsideraPPAasa“normal”supplycontractandaccountfortheenergycostsbasedoninvoicesreceived(executorycontract1).However,pricingmechanisms,thewaythepowerpurchasedisusedandthedesignationofaspecificassetcancausethecontracttobeclassifiedasafinancialinstrument(whichhastobefairlyvaluedineveryreportingperiodandcancauseundesiredvolatilityincompanies’financialresults)oralease(whichresultsinrecognitionofthepowergenerationassetsonthe

1InInternationalFinancialReportingStandards(IFRS),executorycontractsaredefinedascontractsunderwhichneitherpartyhasperformedanyofitsobligationsorbothpartieshavepartiallyperformedtheirobligationstoanequalextent(InternationalAccountingStandard(IAS)37—Provisions,ContingentLiabilities,andContingentAssets).

who should read this paper?Thispapermainlyaimstohelpaccountingprofessionalsatoff-takersaddressissuessurroundingaccountingforcorporatepowerpurchaseagreements.However,wealsobelievethatsustainabilityprofessionalsandcorporatebuyerscouldbenefitfromthispaperbydeepeningtheirunderstandingandawarenessofPPAclausesthatcouldtriggeranunexpectedandundesiredaccountingimpact.Asthetopicsaddressedinthispaperaretechnical,werecommendthatsustainabilityprofessionalsandcorporatebuyersdiscussthecontentwithcolleaguesinfinanceandcontrolfunctions.GiventhecomplexityofaccountingissuesthatmayarisebecauseofPPAcontracts,werecommendtheinvolvementofinternalorexternalcorporatePPAaccountingexpertsearlyinthenegotiationprocessinordertoavoidbindingthecompanytounexpectedandundesiredcorporatePPAaccountingconsequences.


balancesheetandinanincreaseindebtresultinginlowersolvencyratios).Thefundingofaprojectentitythatoperatesrenewablepowerproductionfacilities(hereafterreferredtoastheprojectentity)bymeansofequityinstruments(forexamplebymeansofbuyingsharesintheprojectentity)maytriggertheconsolidationoftheprojectentityorrecognitionoftheassetsandliabilitiesofajointlycontrolledprojectentity.Thiscanpotentiallyhaveanundesiredimpactonthecompany’ssolvencyandotherfinancialperformanceindicators.Theabove-mentionedaccountingmattersarerelevanttomostcorporatePPAsandarethefocusofthispaper.Wenote,however,thatinspecificcircumstancesotheraccountingissuesnotcoveredinthispapermightalsoarise.Thispaperfocusesonaccountingfromtheperspectiveoftheoff-taker.Theoff-takeristheentitythatprocures

thepower,asopposedtothegenerator,whichistheentitythatproducesthepower.However,ifanoff-takeralsodecidestoinvestinprojectsorprojectentitiesrelatingtorenewableenergyincombinationwithaPPA,theoff-takermayalsoenterintoapositionwheregenerationactivitieshavetobeconsolidated.CorporatePPAshavemanydifferentformsandcontaintheirownspecificcontractclausesthatimpactaccountingandfinancialreporting.Thusthepurposeofthispaperistohelpoff-takersunderstandthebasicsofInternationalFinancialReportingStandards(IFRS)astheyrelatetocorporatePPAsinordertoidentifythepotentialaccountingandfinancialreportingconsequencesofenteringintoaPPA.ThispaperisnotcomprehensiveanddoesnotprovideaccountingsolutionsforalltypesofcorporatePPAs.TodeterminetheappropriateaccountingofaPPA,itis

necessarytothoroughlyanalyzetheaccountingbasedonthecontractandspecificfactsandcircumstances.Forthepurposesofthisanalysis,wehaveusedcurrentlyissuedaccountingstandards,includingthosethatwilltakeeffectinthenext18months.WehaveusedIFRS9—FinancialInstruments(IFRS9)insteadofIAS39—FinancialInstruments:RecognitionandMeasurement(IAS39),whichiscurrentlyineffect,andIFRS16—Leases(IFRS16)insteadofIAS17—Leases(IAS17).ThebasisofthispaperisthedecisiontreeshowninFigure1,whichillustratesthepossibleaccountingtreatmentsforPPAcontracts.Thedecisiontreehelpsdeterminewhatcontractualelementsmustbeevaluatedinordertoestablishtheaccounting.Chapter2includesthedecisiontreeaswellasexplanationsoftherelevantquestionsbasedontherelevantIFRSstandards.Chapter3detailstheaccountingimpactofeachoftherelevantissuesbasedontherelevantIFRSstandards.

IntroductIon


Argentina16 companiespart of REscaleTwo workshops and two webinars gathered:• 117 people• 51 companies

REscale globally:49 companies part of REscale• seven workshops and seven webinars• 506 people• 151 companies

India 27 companiespart of REscaleThree workshops and two webinars gathered:• 152 people• 80 companies

• 200 people

China One workshop at theClean Energy Ministerial Corporate Sourcing of Renewables campaign gathered

IntroductIon

Figure 1: Regional engagement activities for Rescalecorporate Renewable Power Purchase

agreements – Scaling up globallyOrganizationsareincreasinglylookingtoreducetheirenvironmental footprint and energy costs. While reducingenergy consumption is often themost obvious wayto reduce impact on the climate, companies need tomaintain continuous business operation. As a result, manyprivate companies are procuring energy from renewablegeneration sources as part of their plans to reduce carbonemissions in their sustainability strategy. The role thatrenewable energy plays in a company’s energy strategyis increasingly elevated from an operational and technicalexercise to a strategic and commercial priority.Thereareanumberofwaysforcompaniestoadoptarenewable energy strategy, for instance through renewableelectricity, heat or transport, all of which have associatedbenefits. Themost accessible solutions in terms of carbonemission reduction for many industries are currentlycentered around renewable electricity.Renewableelectricitystrategiesvaryfrominvestingdirectlyin a generation asset, or purchasing the power from a thirdparty’s project to buying renewable certificates. WBCSD’sglobal report “Corporate Renewable Power PurchaseAgreements – Scaling up globally” focuses on a companypurchasing electricity from an off-site renewable electricityproject via a PPA. Corporate PPAs are a suitable instrumentto address off-take risk for developers and financingparties and therefore can significantly help to increaseandaccelerate the deployment of renewables – the objective ofWBCSD’s REscale business solution.http://www.wbcsd.org/Clusters/Climate-Energy/Resources/Corporate_Renewable_PPAs_Scaling_up_globally

http://www.wbcsd.org/Clusters/Climate-Energy/Resources/Corporate_Renewable_PPAs_Scaling_up_globally

http://www.wbcsd.org/Clusters/Climate-Energy/Resources/Corporate_Renewable_PPAs_Scaling_up_globally


2. Application of accounting guidance for power purchase agreements


PPA Contract

1. Is the PPA combined with funding a project entity with

equity instruments?

2. Is the power supplier a structured entity?

3. Specific asset indentified?

9. does the company have power over the project

entity?

10. Exposure to variable returns of the project

entity?

12. Does the company have joint control over the

project entity?

15. Does the company have significant influence over

the project entity?

13. Project entity structured through a

separate vehicle?

14. Right to assets and obligations for liabilities of

the project entity?

F. Account for project entity based on equity

method (IAS 28)

E. Recognise assets/liabili-ties and eliminate PPA

(IFRS 11)

11. Ability to use its power to a�ect variable returns?

A. Account for the contract as a lease (IFRS 16)

D. Consolidate project entity and eliminate IC PPA

(IFRS 10)

C. Account for the contract as an executory contract

(IAS 37)

B. Account for the whole contract as a derivative

(IFRS 9)

4. Right to obtain substantially all benefits from

the use of the asset?

6. Intention to use all of the energy procured under the

PPA contract?

5. Right to direct the use of the asset?

7. Does the contract contain an embedded derivative?

8. Is the embedded derivative closely related?

B. Account for the embedded derivative separately

N

N

N

NN

N

N

N

Y

Y

Y Y

Y

Y

Y

Y

N

Y

N

Y

YYY

Y

Y

N

N

N

N

N

G. Account for investment as financial instrument (IFRS 9)

a. Decision treeThedecisiontreebelowprovidesanoverviewofthequestionsthatarerelevantinassessingthetopicsofthisaccountingpaper.WeemphasizetheimportanceofusingthisdecisiontreetogetherwiththeclarificationofthequestionsandsupportingguidanceincludedinsectionBtoensurethecorrectunderstandingandinterpretationofthequestions.

Figure 2: Decision tree

ApplIcAtIon of AccountIng guIdAnce for power purchAse Agreements


B. Clarificationandadditionalguidance relating thequestions in the decision tree

1. Doestheoff-takercombinethePPAwith funding a project entity thatholds the power production assets bymeans of equity instruments?Thefundingofaprojectentitythatholdsthepowerproductionassetsbymeansofequityinstrumentsmaytriggertheconsolidationorrecognitionofassetsandliabilitiesofaprojectentity.Fundingmightbeprovidedbymeansofdebtinstrumentsorequityinstruments.Fundingbymeansofequityinstrumentswithassociatedvotingrightsmayresultinconsolidation.Forhybridinstruments,itisnecessarytoanalyzethedebt-equityclassificationinmoredetailbasedonIAS32—FinancialInstruments:Presentation(IAS32).

2. Istheoff-takerinvolvedinpurchasingpower from a structured entity thatowns the power production assets?Structuredentitiesareoftendesignedforaspecificpurpose,whichmayincludetheprovisionofpowerfromrenewablesources.Iftheoff-takerpurchasespowerfromastructuredentity,itmayalsohavetoconsolidatethisentityifitcontrolsthestructured

entity,includingbymeansotherthanvotingrights.IFRS12-Disclosureofinterestsinotherentitiesdefinesastructuredentityasanentitythathasbeendesignedsothatvotingorsimilarrightsarenotthedominantfactorindecidingwhocontrolstheentity.Thisincludeswhenanyvotingrightsmayrelatetoadministrativetasksonlyandtherelevantactivitiesaredirectedbymeansofcontractualarrangements.Thedifferencewithstructuredentitiesisthat,often,thenormalsubstantivepowers(suchasvotingrights)arenotthemeansbywhichtheinvestorcontrolstheinvestee.Rather,itisthecontractsthatdirectrelevantactivities.Ifthecontractsaretightlydrawn,itmightinitiallyappearthatnoneofthepartieshaspoweroverthestructuredentity.Asaresult,additionalanalysisisrequiredtoascertainwhichpartycontrolsthestructuredentity.ControlofastructuredentityisdeterminedusingthesameframeworkinIFRS10thatisusedforallotherentities(referenceismadetoquestions9through11).Itisnecessarytoconsider:• Thepurposeanddesignofthestructuredentity;• Whattherelevantactivitiesare;• Howdecisionsaboutthoseactivitiesaremade;• Whethertherightsoftheinvestorgiveitthe

currentabilitytodirecttherelevantactivities;• Whethertheinvestorisexposed,orhasrights,

tovariablereturnsfromitsinvolvementwiththeinvestee;



• Whethertheinvestorhastheabilitytouseitspowerovertheinvesteetoaffecttheamountoftheinvestor’sreturns.

Otherconsiderationsinclude:• Whetherthedecision-makerisadefactoagent

ofsomeoneelse;• Whetherthereareanysilosthatshouldbe

consideredseparatelyforconsolidation.

Questions3-5relatetothefundamentalquestionastowhetherthePPAcontainsalease.IFRS16includesguidanceonwhenacontractisconsideredtobe,orcontains,alease.APPAis,orcontains,aleaseifthecontractconveystherighttocontroltheuseofanidentified(specific)asset(e.g.windmillorsolarfarm)foraperiodoftimeinexchangeforaconsideration(mostlyamonetarycompensationbasedonthesalespriceincludedinthecontract).ItisimportanttoundertakecarefulanalysistodeterminewhetheraPPAincludesanembeddedleaseunderIFRS16.TheresultingaccountingimplicationscanbesignificantandthecontractualarrangementsofaPPAusuallyarenotstructuredordescribedasordinaryleasecontracts.

Figure 3: Identifying a lease


Does the customer have the right to obtain substantially all of the economic benefits from the use of the asset throughout the period of use ?

Supplier

Contract contains a lease Contract does not contain a lease

Yes

Yes

Yes No

No

No

Customer

• Operates the asset or

• Has designed the asset?

Predetermined

Is there an identified asset?

Customer

Who has the right to direct how and for what purpose the asset is used throughout the period of use ?


3. DoesthePPAidentifyaspecificasset?ThefirstassessmenttodetermineifthePPA containsaleaseiswhetherthePPAidentifiesaspecificassetorassetsonwhichthefulfilmentofthecontractisdependent.Anassetcanbeexplicitlyidentifiedinacontract(e.g.serialnumber)butcanalsobeimplicitlyidentifiedatthetimetheassetismadeavailableforusebythelessee(e.g.thepowersupplierhasnoalternativeassetsthatcanbeusedtofulfilthecontract).Ifthesupplierhasthesubstantiverighttosubstitutetheassetthroughouttheperiodofuse,thereisnoidentifiedasset.Asupplier’srighttosubstituteanassetissubstantiveonlyifbothofthefollowingconditionsexist:1) Thesupplierhasthepracticalabilitytosubstitute

alternativeassetsthroughouttheperiodofuse(forexample,thecustomercannotpreventthesupplierfromsubstitutinganassetandalternativeassetsarereadilyavailabletothesupplierorcouldbesourcedbythesupplierwithinareasonableperiodoftime);and

2) Thesupplierwouldbenefiteconomicallyfromtheexerciseofitsrighttosubstitutetheasset(thatis,theeconomicbenefitsassociatedwithsubstitutingtheassetareexpectedtoexceedthecostsassociatedwithsubstitutingtheasset).

Wenotethatacapacityportionofanassetcanalsomeetthedefinitionofaspecificassetiftheportionisphysicallydistinct.Iftheportionisnotphysicallydistinctbuttheportionrepresentssubstantiallyallofthecapacityoftheassetandtherebyprovidesthecustomerwiththerighttoobtainsubstantiallyalloftheeconomicbenefitsfromtheuseoftheasset,theportionisstillconsideredaspecificasset.

4. Doestheoff-takerhavetherightto obtain substantially all of theeconomic benefits from the useoftheasset throughout the period of use?Thearrangementmustconveytherighttoobtainsubstantiallyallofthepotentialeconomicbenefitsthatcanbeobtainedfromdirectingtheuseoftheassetthroughouttheperiodofusetobealease.Specifically,itisnecessarytoconsidertherightstotheoutputandothereconomicbenefitsderivedfromtheuseoftheasset.Economicbenefitsgenerallyincludetheprimaryoutput/powerproducedbytheasset.Anoff-takerhastherighttoobtainsubstantiallyalloftheeconomicbenefitsfromtheuseoftheassetif,forexample,thePPAindicatesthatsubstantiallyallpowerthattheassetofthesupplierproducesduringitsusefullifeispurchasedbytheoff-taker.However,aplant’scapacitytoproduceoutputmightnotalwaysbetheonlymeansfromwhichtoderiveeconomicbenefitsfromitsuse.

Theeconomicbenefitsthatanentitycanderivefromarenewablepowerplantcanrelatetomorethanjustpower.Forexample,thepowerplantmayalsogenerateeconomicbenefitsthatrelatetorenewableenergycredits.(Wenotethataccountingforrenewableenergycreditsitselfishighlyjudgmentalandlimitedformalguidanceexists.Therefore,thispaperdoesnotaddressaccountingforrenewableenergycreditsandwerecommendinvolvinganaccountingspecialisttodiscussanyquestionsaroundaccountingforsuchcredits).



5. Doestheoff-takerhavetherighttodirect the use of the identified assetthroughout the period of use?Thisconditionismetwhen:1) Theoff-takerhastherighttodirecttheuseofthe

assetifitcandecidehowandforwhatpurposetheassetisused.Examplesarerightstodecidewhenthepowerisproduced,whetherpowerisproducedornotandthevolumeofthepowerproduced;or

2) Therelevantdecisionsabouthowandforwhatpurposetheassetisusedarepredeterminedand:i. Theoff-takerhastherighttooperatetheasset

(ortodirectotherstooperatetheassetinamannerthatitdetermines)throughouttheperiodofuse,withoutthesupplierhavingtherighttochangethoseoperatinginstructions;or

ii. Theoff-takerdesignedorinfluencedthedesignoftheasset(orspecificaspectsoftheasset)inawaythatpredetermineshowandforwhatpurposetheassetwillbeusedthroughouttheperiodofuse.Itisaprerequisitethatthedesignofpowerproductionfacilitiespredetermineshowandforwhatpurposetheassetswillbeusedthroughouttheperiodofusebecauseitdeterminestheresultingeconomics.Iftheoff-takerdesignedorinfluencedthedesignoftheassets,itisassumedthattheoff-takerhastherighttodirecttheuseoftheseassetandthisconditionismet.

Anoff-takerwillhavetherighttodirecttheuseofapowerproductionfacilityifitcandirect(andchange)howandforwhatpurposetheassetwillbeusedthroughouttheperiodofuse.Thismaynotbesubstantiveinthecaseofrenewablepowergeneratingassetsoncetheyarecontractedforasthereisnofeasiblealternativeuseotherthantogeneratepower.However,ifthehowandforwhatpurposetheassetwillbeusedaredeterminedbeforethebeginningoftheperiodofuse,e.g.predeterminedbycontractordesignoftheasset,anoff-takerstilldirectstheuseoftheassetifithaseither:1) Operationalcontrolovertheasset;or2) Controloverthedesignofthoseaspectsofthe

powerproductionfacilitythatpredeterminehowandforwhatpurposeitwillbeused.

Designisexpectedtobeamuchmoreimportantindicatoroftherighttodirecttheuseoftheassetwhentheeconomicsareeffectivelyfixedinanarrangementpriortouse.Inassessingthesignificanceofdesign,areportingentityshouldconsiderhowmuchvariabilityiscreatedduringtheoperationoftheassetthatisnotdeterminedthroughitsdesign.Anowner/supplier’sprotectiverighttoinspecttheirpowerproductionfacilitytoensureitisbeingoperatedproperlyandmaintainedsufficientlyshouldnotbeafactorindeterminingwhocontrolstheasset.Theserightsareprotectiverightsnotdecision-makingrights.

PPAsmayrequirecooperationbetweentheoff-takerandthegeneratorinareassuchasthedailyoperationofthepowerproductionfacility,managerialtasks,decisionsabouttheoptimizationoftheassetsandpotentiallythedesignoftheassetinordertoachievetheoptimumfunctionalityoftheunderlyingassets.ThetermsofaPPAshouldbecarefullyassessedtodeterminewhetherthearrangementcontainsanembeddedlease.

6. Doestheoff-takerhavetheintentionto use all of the power procured underthe PPa contract?PPAcontractscanmeetthedefinitionofaderivativecontractasenteringintoaPPAcontractdoesnotrequireaninitialnetinvestment:thevalueofthecontractisbasedonthepriceofpowerandthecontractissettledatafuturedate.However,suchPPAcontractsarenotwithinthescopeofIFRS9ifallthepowerprocuredunderthePPAcontractisfortheuseoftheoff-taker.Thisisreferredtoastheown use exemption.Iftheownuseexemptioncannotbeapplied,thePPAcontractasawholeiswithinthescopeofIFRS9andmustbeaccountedforasaderivative.Theassessmentofwhethertheownuseexemptionisapplicableisdifficultandrequiresjudgement.



Relevantconsiderations,amongothers,inthisassessmentmay include:• Thevolumeofthepowersupply:Ifthevolume

specified in the PPA exceeds to the volumeused in the course of the off-taker’s ordinarybusiness, then the off-taker will need to sell apartof the power purchased. Because the off-takerwill not use all power itself, the PPA is within thescope of IFRS 9 and has to be accounted foras a derivative. Determining PPA volumes canbe subjective in cases of uncertainty about thevolume of power to be purchased under the PPA.Uncertainty can arise when, for example, the PPAincludes a bandwidth volume or the output ofthe related power production facility is variable.The latter is often the casewith renewable powerproduction facilities such aswind and solar parks.Assessingwhether or not the own use exemptionis applicable in these instances requires judgmentand has to be done on a case-by-case basis.

• Thegridtowhichthesupplierandtheoff-takerare connected: The power obtained under thePPAmust be delivered to the same grid fromwhich the off-taker consumes its power tosupport the claim that the power purchasedisused by the off-taker. Therefore, cross-borderPPA contractsmay be excluded frombeingaccounted for as an own use contract.

• Writtenoptions:PPAsthatcontainanoptionwritten by theoff-taker providing thegeneratorwith a right to sell the power relating to thePPAmean that theownuseexemption is notmet. Theoff-taker that haswritten theoption cannot control

whethertheoptionwillbeexercisedandcannotclaim that the contractwasentered intowith thepurposeof purchasingpower thatwill be used intheoff-taker’s ordinary courseof business.

• Netsettlement:Theownuseexemptioncannotbe applied if the off-taker intends to or practicesnet settlement of the contract. Net settlementis often used in virtual PPAs andmeans thatthe power is not always delivered under thecontract but instead the expected net gain orloss on the contract is paid for or received bythe off-taker. IFRS 9 describes several ways inwhich a contract can be net settled. Themosttypical situation is if the terms of the PPA alloweither party to net settle in cash or by exchangingfinancial instruments. If the right to net settle isnot included in the terms of the contract but theoff-taker has a practice of net settling similarcontracts by entering into offsetting contractswith the same counterparty or by selling thecontract before its exercise or lapse, the abilitytonet settle is deemed to be present. Furthermore,net settlement is deemed to be present when,for similar contracts, the entity has a practiceof taking delivery of the underlying and sellingitwithin a short period after delivery for the purposeof generating a profit from short-term fluctuationsin price or a dealer’smargin (i.e. trading activity).Other ways to net settle a contract exist but aregenerally not relevant for PPA contracts.

UnderIAS39,iftheown useexemptionismet,thecontractmust not be accounted for as a derivative(the application of the own use exemption is not a

choice).However,thecontractmaybeaccountedfor at fair value under IFRS 9 if doing so removesan accountingmismatch (the fair value option). Anexample of this is when the off-taker has hedged thefair value of a fixed price PPA contract with a swap thatismeasured at fair value. By also accounting for thePPA contract at fair value, with changes of both theswap and the PPA contract being recognized in profitor loss, the off-taker avoids amismatch between themeasurement of the PPA contract and the swap.

7. Does the PPa contain an embeddedderivative?PPAcontractsmayincludetermsandconditionsthatresemble and behave like a free-standing derivative.IFRS requires theses embedded derivatives to be separated from the host contract and accounted foras if they were free-standing derivatives in certaincircumstances. A contract that consists of a hostcontract and one ormore embedded derivatives isreferred to as a hybrid instrument.Determiningifahostcontractcontainsanembedded derivative can be challenging. Akeyindicator that an embedded derivative may beincluded in the host contract is that the cashflows over the contract term vary according toaspecified index, rate or price, such as commodityprices. PPA contracts often contain complex pricingarrangements that refer to a power price, oftenwith a certain floor price or cap price, and as suchmust be evaluated for the existence of embeddedderivatives.



ExamplesofembeddedderivativesrelatingtoPPAs(listnotfullyinclusive):• Pricingisbasedonanindex:Thisisapplicable

whenthepricingforthepowersupplyinthePPAincludesareferencetoanylistedpriceorindex.Thereferencedoesnotnecessarilyrelatetothepowerpriceitself.Thepricecanalsobelinkedtootherindices,forexampleanoilindex.

• Leveragefeatures:Acontractcontainsleveragefeaturesifthecontractuallyrequiredcashflowsaremodifiedinthecontractualtermsinsuchawaythatthecashflowsmultiplyorotherwiseexacerbatetheeffectofthechangeintheindexorpowerprice(s).

• Caporflooronthepowerprice:PPAcontractsmayincludecertainpowerpricelimits.ThetermscanincludeclausesthatdeterminethatthepricecannotbehigherthanXorlowerthanY.Hencethepriceisvariable,butonlytoacertainextent.

• Foreigncurrencies:PowerpricesinthePPAcontractsaredenominatedinaforeigncurrency.

ExamplesofembeddedderivativesrelatingtoPPAsthatcontainalease(listnotfullyinclusive):• Leasepaymentsarebasedonaninflationindex:

Inthisinstance,thepaymentsspecifiedinthePPAcontractsareadjustedtoaconsumerprice-index.

• Leasepaymentsareindexedtoavariableinterestrate:ThepricespecifiedinthePPAcontracts

canbeadjustedovertimebasedonchangesinaspecifiedvariablerateinterest,suchastheLondonInterbankOfferedRate(LIBOR).

• Leasepaymentsinaforeigncurrency:PPAcontractscanspecifypaymentsthataredenominatedinacurrencyotherthanthefunctionalcurrencyofthelesseeorthelessor.

• Termextensionoptions:ThebuyerinthePPAcontracthastooptiontoextendthetermofthecontract.

8. Is the embedded derivative closelyrelated?IFRS9doesnotprovideaspecificdefinitionoftheclosely relatedconcept.Rather,IFRS9providesanumberofexamplesthatdetailwhyinaspecificcasetheembeddedderivativeiscloselyrelatedtothehostcontractornot.Theexamplesmakeclearthattheassessmentisinessenceacomparisonbetweentheeconomiccharacteristicsandrisksoftheembeddedderivativeandtheeconomiccharacteristicsandrisksofthehostcontract.Akeyfactorthatdeterminestheriskofaderivativeistheunderlying(i.e.theindex/priceofthenon-financialitem)andtheextent(leverage)towhichchangesintheunderlyingaffectthesettlement.Inordertomeetthecloselyrelatedcriterionforanembeddedderivativeinacontracttobuyorsellanon-financialitemlikepower,itisexpectedthattheriskunderlying



theembeddedderivativesishighlyrelatedtotheriskofthatnon-financialitem.Riskoftenrelatestopricingandthereforeitshouldbedeterminedwhetherthepriceadjustmentfeaturesarerelatedtothecostorfairvalueofpower.ExamplesofembeddedderivativesrelatingtoPPAsbeingcloselyrelatedornot:• Pricingbasedonanindex:Anindexisclosely

relatedifitseconomiccharacteristicsandrisksaresimilartothoseofthepowersupplyitself(e.g.ifitislinkedtothepricesonthepowermarket).Forexample,iftheindexincreasesbecauseofacertainmarketdevelopment,butthepowerpriceisaffecteddifferently(i.e.isnotaffected,isaffectedlessormore,orinsteadofincreasing,itdecreases)basedonthesamemarketdevelopment,itseconomiccharacteristicsandrelatedrisksarelikelytobedifferent.Consequently,theindexislikelynotcloselyrelatedtothepowersupplyofthePPA.

• Leveragefeatures:APPAcontractinwhichthepriceadjustmentfeature(i.e.theindex)iscloselyrelatedtothepriceofpowermaynotbecloselyrelatedifthecontractcontainsalevelofleverage.Leverageresultsinadiscrepancybetweentheriskofthehostcontractandtheriskoftheembeddedderivativesasthetwonolongerbehaveinasimilarwaytochangesintherisk.IFRSdoesnotdefinewhatlevelofleveragecausesanembeddedderivativetonolongerbeconsideredcloselyrelated.Wenotethatan

inflationadjustmentfeatureisnotconsideredleverageifthespecificinflationindexchosenisrelatedtotheeconomicenvironmentthecompanyoperatesinandtheinflationcorrectionisnotleveragedinitself.Asalevelofleverageisnotdefined,judgementneedstobeapplied.

• Caporflooronthepowerprice:PPAcontractsoftencontainpricingarrangementsthatarelinkedtoapowerpriceindex.Inordertolimittheextenttowhichthepartiesareexposedtochangesintheindex,lower(floor)andupper(cap)limitsonthepriceindexmaybeincludedinthePPA.UnderIFRSthesecapsandfloorsareconsideredcloselyrelatedwhen,atthetimetheoff-takerentersintothecontract,thecapandfloorareout of the money.Thismeansthatthecurrentmarketpriceisnotlowerthanthefloorandnothigherthanthecapandhencethecapandfloorcurrentlydonotimpactthepriceforwhichthepowerispurchased.

• Foreigncurrencies:AnembeddedderivativerelatingtoforeigncurrenciesisnotcloselyrelatedifthecurrencyofthePPAisnot:

º Thefunctionalcurrencyofthepowersupplierortheoff-takeritself;

º Thecurrencyinwhichthepowerpriceisroutinelydenominatedincommercialtransactionsaroundtheworld;or

º Thecurrencythatiscommonlyusedincontractstopurchaseorsellnon-financial

itemsintheeconomicenvironmentinwhichthepowersupplytakesplace.

ExamplesofembeddedderivativesrelatingtoPPAsthatcontainaleasebeingcloselyrelatedornot:• Termextensionorrenewaloptions:Therightto

extendtheleaseisnotarighttoborrowfundsforafurtherperiod,aswouldbethecasewithadebtinstrument;rather,therighttoextendtheleaseisarighttouseanon-financialassetforanadditionalperiod.Furthermore,underIFRS16theextensiontermwouldeitherbeincludedinthecalculationoftheleaseterm(ifitisreasonablycertainthatattheinceptionoftheleasethelesseewillexercisetheoption),ortherenewalwouldconstituteanewleasebecausetheleasedassetandthecorrespondingliability(ifeitherexists)wouldhavebeenamortizedtonilbytheendoftheoriginalleaseterm.Hence,thereisnoneedtoseparateanembeddedderivative.

• Terminationclauses:TheleaseinthePPAcontractmightcontainaterminationclausethatallowsthelesseetoterminatethecontract,butonlyonpaymentofapenalty.Wherethispenaltypaymentensuresthatthelessorwillbeabletorecoveritsremaininginvestmentinthelease,thentheoptioniscloselyrelated.Thissituationissimilarinsubstancetoaprepaymentoptioninadebtinstrument,whichisconsideredcloselyrelatedincircumstanceswheretheoption’sexercisepriceisapproximatelyequaltotheamortizedcostofthedebtinstrument.



• Inflationlinkedpayments:Iftheleasepaymentsareindexedtoaninflationindexthatisrepresentativefortheeconomicenvironmentinwhichthegenerationassetislocatedanddoesnotcontainaleveragefeature,thentheembeddedderivativeisconsideredcloselyrelated.

Questions9to11relatetowhethertheoff-takercontrolsaprojectentity.Theoff-takerhaspoweroveraprojectentitywhentheoff-takerhasexistingrightsthatgiveitthecurrentabilitytodirecttherelevantactivities,i.e.theactivitiesthatsignificantlyaffectthereturnsoftheprojectentity.Powerarisesfromrights.

9. Doestheoff-takerhavepoweroverthe project entity?Sometimesassessingpowerisstraightforward,suchaswhenpowerisobtaineddirectlyandsolelyfromthevotingrightsgrantedbyequityinstrumentssuchassharesandcanbeassessedbyconsideringthevotingrightsfromthoseshareholdings.Inothercases,theassessmentwillbemorecomplexandrequiremorethanonefactortobeconsidered,forexamplewhenpowerresultsfromoneormorecontractualarrangements.Anexampleofacontractualarrangementindicatingtheabilitytodirect(havingpower)iswhenanoff-takerhastheabilitytoappointthekeymanagementpersonnelorhasapprovalrightsrelatingtooperational,financialand/orinvestingdecisions.Sincethesecontractualtermsensurethattheoff-takercandirectthedayto

dayactivities,thesetermsmightformthebasistoconcludethattheoff-takerhasthepowerovertheprojectentity.Itisimportanttoidentifytherelevant activitiesandwhichpartyhastheabilitytodirectthoserelevantactivities.Relevantactivitiesareactivitiesthatsignificantlyaffecttheprojectentity’sreturns(IFRS10 —ConsolidatedFinancialStatements,AppendixA).Examplesofrelevantactivitiesthatrelatetoprojectentitiesaremaintenancedecisions,investmentdecisions,decisionsrelatedtofinancing,decisionsrelatedtoproduction,budgetdecisions,etc.Itisnecessarytoassesstheabilitytodirectthoseactivitiesandnotwhetherthisabilityisused.

10. Istheoff-takerexposedtothevariable returns of the project entity?Exposuretovariablereturnsfromitsinvolvementwiththeprojectentityexistswhenthereturnstheoff-takerreceivesvarybasedontheperformanceoftheprojectentity.Returnsdonotnecessarilyneedtobedividendsbutmaytakeotherforms,suchasreturnsthatarenotavailabletoothers,forexamplesynergies.

11. Doestheoff-takerhavetheabilitytouse its power to affect the amount ofits returns?Thisfinalcriterioncombinesthetwofactorsmentionedinquestions9and10.Anoff-takercontrolsaprojectentityiftheoff-takernotonlyhaspowerovertheprojectentityandexposuretorightstovariablereturnsfromitsinvolvement,butalsohastheabilitytouseitspowertoaffecttheoff-taker’sreturnfromitsinvolvementintheprojectentity(IFRS10.17).Thusanoff-takerwithdecision-makingrightsshalldeterminewhetheritisaprincipaloranagent.Ifanoff-takeractsasanagent,itactuallymakesthedecisionsonbehalfoftheprincipals(IFRS10.18).However,whentheoff-takerdelegatesitsabilitytouseitspowertoanotheroff-taker,forexampletoappointmembersoftheprojectentity’skeymanagementpersonnelwhomakeimportantdecisionsontheirbehalf,thismightbeanindicationthattheoff-takerisactingasaprincipalandthereforehastheabilitytouseitspowerovertheprojectentityinordertoaffectthereturns.



Anoff-takerhastocarefullyconsidertheoverallrelationshipbetweenitself,theprojectentityandanyotherpartiesinvolvedindeterminingwhetheritisanagent,inparticularallfactorsbelow(IFRS10.B60):• Thescopeofitsdecision-makingauthorityover

theinvestee;• Therightsheldbyotherparties;• Theremunerationtowhichitisentitled;and• Thedecisionmaker’sexposuretovariability.

12. Doestheoff-takerjointlycontroltheproject entity?JointcontroloveraprojectentityexistswhenthereisacontractualarrangementwhereatleasttwopartiesagreetosharecontrolovertheactivitiesoftheprojectentityinaccordancewithIFRS11—JointArrangements(IFRS11).Partiessharecontroliftheyagreeonunanimousconsentfordecisionsaboutrelevantprojectentityactivities.Thiscanbearrangedinacontractorcanbetheresultoftwopartieshaving50%ofthevotingrights(incombinationwiththeexposuretovariablereturnsandtheabilitytousetheirpowertoaffecttheamountoftheirreturns).Projectentitiesoverwhichcontrolisexercisedjointlycanbeclassifiedas:• Ajointoperation,whichisanarrangement

wherebythepartiesthathavejointcontrol

ofthearrangementhaverightstotheassetsandobligationsfortheliabilitiesrelatingtothearrangement;

• Ajointventure,whichisanarrangementwherebythepartiesthathavejointcontrolofthearrangementhaverightstothenetassetsofthearrangement.

Theclassificationdependsonthenatureoftheparties’exposuretothearrangementwhichisassessedbasedonquestions13and14below.Iftheprojectentityisclassifiedasajointventure,theoff-takerhasaPPAwiththeirjointventure.Theoff-takerhastodeterminetheaccountingofthePPAwiththisjointventureaswell(refertothearrowtoquestiontwointhedecisiontree).

13. Is the jointly controlled projectentity structured through a separatevehicle?Thefirstquestiontodeterminetheclassificationiswhetherthearrangementisstructuredthroughaseparatevehicle.Ajointarrangementthatisnotstructuredthroughaseparatevehicleisajointoperation.Insuchcases,thecontractualarrangementestablishestheparties’rightstotheassetsandobligationsfortheliabilitiesrelatingtothearrangement,andtheparties’rightstothecorrespondingrevenuesandobligationsforthecorrespondingexpenses.



14. Doestheoff-takerhaverightstothe assets and obligations to theliabilities of the project entity?Ifthearrangementisstructuredthroughaseparatevehicle,thepartiestothejointarrangementhavetoanalyzetheunderlyingcontractualagreementstodeterminewhetherthearrangementgrantsrightstoassetsandobligationsforliabilities,orwhetheritgrantsrightstonetassets.TheunderlyingrightsandobligationsofthepartiesneedtobeconsideredinthecontextofIFRS11.17:• Legalformofthevehicle:Thearrangement

isajointoperationonlyifthelegalformoftheprojectentitydoesnotcreateaseparationbetweenthepartiesandtheprojectentity.Thismeansthattheassetsandliabilitiesheldintheseparatevehiclearetheparties’assetsandliabilities.

• Termsofthecontractualarrangement:Theprojectentityisajointoperationifthetermsandconditionsofothercontractualarrangementsgrantrightstotheassetsandcreateobligationsforliabilitiesoftheprojectentity.

• Potentialotherrelevantfactsandcircumstances:Whetherthepartiesdesignedthearrangementsothatitsactivitiesprimarilyaimtoprovidethepartieswithanoutput.Thismightbethecasewhenthepartieshaverightstosubstantiallyalltheeconomicbenefits/powerproducedbytheprojectentity(bypreventingtheprojectentityfromsellingpowertothirdparties)andsettlementoftheliabilitiesoftheprojectentitydependsonthecashflowsreceivedfromthepartiesonacontinuousbasis.

Thesecriteriahavetobeassessedbutareseldommetiftherenewableenergygeneratorisinalegalentitythatcreatesseparation.

15. Doestheinvestorhavesignificantinfluence over an entity?Significantinfluenceispresumedtoexistwhenanoff-takerholdsatleast20%oftheinvestee’svotingpower.Itispresumednottoexistwhentheoff-takerholdslessthan20%.However,thesubstanceofthearrangementisthekeyfactor;therefore,itcouldalsobethatapartyholdinglessthan20%ofthevotingpowerdoeshavesignificantinfluence,ifthisisclearlydemonstrated.Ifsignificantinfluenceispresent,theprojectentityisclassifiedasanassociate.Ifnot,theoff-taker’sshareholdingintheprojectentityisafinancialinstrumentasdescribedunderIFRS9.Inbothcases,theoff-takerhasaPPAwithanassociateorwithanentityinwhichitholdsaninvestment.ItisnecessarytodeterminetheaccountingofthePPAwiththisassociateorinvestmentaswell(refertothearrowtoquestiontwointhedecisiontree).



3. Accounting impact


ThischapterdescribesthemainelementsofPPAcontractaccountingbasedonthevariousscenariosofthedecisiontreeresults(greyboxes).ItfocussesonthemainelementsthatareexpectedtoberelevantforPPAcontractsinordertoprovideanunderstandingofthetopicsandconsiderationsthatmightbeapplicable.ItdoesnotaimtoprovideacomprehensiveexplanationofallpotentialaccountingconsequencesforPPAcontractsasadetailedanalysisoftherelevantstandardsandspecificfactsandcircumstancesisnecessarytodetermineanddrawconclusionsabouttheaccountingofindividualPPAs.Thispaperincludesseveralexamplesillustratingthevariousaccountingimplications.ThefactsandcircumstancesofeachexampleareadjustedforthevariousaccountingscenariosinordertoillustratetheaccountingimpactofcertainPPAcontractclauses.

AccountIng ImpAct

Example–BasicfactsandcircumstancesCompanyXisaproductioncompanywithonecentralproductionlocation.Thislocationconsumes30,000MWh per year. Company X has a defined corporate social responsibility (CSR) strategy and part of thisstrategy is to decarbonize their energy consumption. In addition, Company X considers its exposure toenergy price fluctuations and the related volatility in its income statement. To achieve its CSR goals relatingto decarbonizing its energy consumption and in order to reduce exposure to the variable energy prices,Company X decided to enter into a corporate PPAwithWindmill Park Y. Windmill Park Y consists of 10windmills, each producing approximately 2,500MWh per year. In the power purchase agreement, CompanyX (the purchaser) andWindmill Park Y (the supplier) agreed that Company X will purchase 25,000MWh yearlyfromWindmill Park Y over the next 15 years for CU 45 perMWh. Company X will use the energy for its ownproduction facilities.Thisagreementhasadvantagesforbothparties.CompanyXreducesthevolatilityfluctuatingenergyprices will have on its income statement since it will have a stable energy price for a large part of its energyconsumption. Windmill Park Y has a stable revenue stream as it has certainty that it will sell 25,000MWh at afixed price for the coming 15 years.


a. Account for the contractas a lease

IftheconclusionisthatthePPAis,orcontains,alease,theoff-takerhastorecognizearight-of-use assetandcorrespondingleaseliabilityonthebalancesheet.Theleaseliabilityreflectstheobligationtomakeleasepaymentsinexchangefortherighttousetheunderlyingassetandismeasuredatthepresentvalueofthefutureleasepayments.IFRS16.27explainswhichpaymentsshouldbeincludedinthemeasurementoftheleaseliability.Amongothers,fixedpayments,fixedin-substancepayments,andvariablepaymentsthatdependonanindexshouldbeincludedinthemeasurementoftheleaseliability.DiscussionsareongoingastowhetherPPApaymentsrelatingtoasolarplantorwindfarm(whichareclassifiedasalease),whicharebasedontheproductionandsalesofelectricity,arevariable(becausetheyaredependentontheavailabilityofwindorsunandtheactualproductionofelectricity)orarefixedinsubstance(becauseanobligationexiststhatcanbeestimatedreliably).Atthemoment,theconsensusisthatthesepaymentsaregenuinelyvariableandshouldnotbeincludedinthemeasurementoftheleaseliability.Theleasepaymentsarediscountedusingtheinterestrateimplicitinthelease,ifthatratecanbereadilydetermined.Ifthatratecannotbereadilydetermined,thelesseeshallusethelessee’sincrementalborrowingrate.BecauseitmightbedifficulttodeterminetheimplicitinterestrateofaPPA(PPAcontractsareusuallynotdesignedasaleaseandthecashflowsrelatingthePPAmayvarybasedonproductionvolumes),the

incrementalborrowingratecanbeusedtodeterminethediscountrateforthepresentvaluecalculation.Thecashflowsshouldbebasedonthevolumesandpricesagreedinthecontract.Forleasepaymentsincludedinthemeasurementoftheleaseliability,furtherreferenceismadetoIFRS16.27and16.28.Theright-of-useassetrelatingthePPAisaccountedforattheamountoftheinitialmeasurementoftheleaseliability(togetherwithanyinitialdirectcostsincurredbytheoff-taker).Forfurtherdetailsrelatingtotheinitialmeasurementoftheright-of-useassetatcost,referenceismadetoIFRS16.24.

Theright-of-useassetisincludedinthetangiblefixedassetsonthebalancesheet.Theoff-takerrecognizestheinterestexpensefromtheleaseliabilityanddepreciationoftheright-of-useasset.Theoff-takeraccountsforcashpaymentspartiallyasrepaymentoftheleaseliabilityandpartiallyasinterestexpense.Theoff-takerclassifiescashpaymentsfortheprincipalportionoftheleaseliabilitywithinfinancingactivitiesinthecashflowstatementwhilepresentingtheinterestportionasanoperatingcashflow(ifthechosenaccountingpolicyistopresentinterestpaymentsasoperatingcashflows).

AccountIng ImpAct

Example–ThePPAcontainsaLeaseUsingthesamesituationasintheinitialexample,furtherassumethatthecompanyhasidentifiedthewindmillparkit wants to use and has the ability to direct its use and can decide what production volumes the company needs.The specific assets relate to the windmill park and the company purchases all energy relating to the windmillpark during the PPA’s 15-year term, which covers almost the whole useful life of the assets for a fixed amountofCU 1,125,000 per year. The conclusion is that the company has substantially all of the economic benefits of theassets. Based on these facts and circumstances, the company must account for the PPA as a lease.AssumingthattheimplicitinterestrateoftheleasecannotbederivedfromthePPAandtheincrementalborrowing rate of the company amounts 6%, the company has to account for a lease liability of CU 10,926,280,which is equal to the present value of the yearly payment of CU 1,125,000 over 15 years. Assuming that no otherrelated expenses are applicable, the company also accounts for a right-of-use asset of CU 10,926,280.Thedepreciation,calculatedonastraight-linebasis,amountstoCU728,419peryear,whichisbasedontheinitialmeasurement of the right-of-use asset divided by 15 years. The payment of CU 1,125,000 has to be split in partsthat relate to the interest expense and the repayment of the principal for the lease liability. The interest expensefor the first year amounts to CU 655,577 and is based on 6% over the liability of CU 10,926,280 at the beginningof the period. The company deducts the remaining part of the payment — CU 469,423 —from the amount of theliability as repayment. The company charges a total expense of CU 1,383,995 to the profit and loss account inthe first year.


IfthePPAis,orcontainsalease,andtheamountsarefixed,theaccountingmaysignificantlyimpacttheoff-taker’sfinancialstatementsandkeyratiossuchasEBITDA(earningsbeforeinterest,taxes,depreciationandamortization),debt-to-equityandinterestcoverratios.Theseratiosareoftenconsideredwhenmonitoringdebtcovenantsanddeterminingmanagementincentiveschemes,whichcanhaveimplicationsgoingbeyondaccounting.APPAthatdoesnotcontainaleaseisaccountedforasaregularsupplycontractinwhichtheexpensesarepresentedaspartofcostofgoodssoldoroperatingexpenses.TheexpensesofaPPAaccountedforasaleasewillbeclassifiedasdepreciationandinterestexpenses.Thiswillhaveapositiveimpactonthenon-IFRSEBITDA2 measure.AnotherconsequenceisthatinterestexpensesdecreaseduringthetermofthePPAanddepreciationexpensesareusuallyaccountedforonastraight-linebasis;thenetfinancialresultduringthefirsthalfofthecontracttermislowerthanacomparablePPAaccountedforasregularsupplycontract.Itistheoppositeinthesecondhalfofthecontractterm.Finally,leaseaccountingnegativelyimpactsthesolvencyratioasadditionalfinancialliabilitiesareincludedinthebalancesheet.

ThedifferencebetweenIAS17andIFRS16IFRS16goesintoeffecton1January2019andreplacesthecurrentIAS17standard.TheconceptofcontrolovertheuseofanidentifiedassetinIFRS16isbasedonbothapowerelement(therighttocontroltheuseofanidentifiedasset)andabenefitelement(therighttoobtainsubstantiallyalloftheeconomicbenefitsfromtheuseofthatasset).WhilealeasecouldalsoexistunderIAS17solelybasedonthecustomerhavingtherighttoobtainallofthepoweroroutputfromanidentifiedasset,thecustomerwillneedtohavedecision-makingrightsovertheuseoftheassetfortheretobealeaseunderIFRS16.Withouttherighttocontroltheuseofanidentifiedasset,thecustomerhasnomorecontrolovertheassetthananyothercustomerpurchasinggoodsorservicesfromthesupplier.IAS17distinguishesbetweentwotypesofleaseclassifications:afinancialleaseandanoperatinglease.Theclassificationoftheleaseaseitherfinanceoroperatingisbasedonwhetherthearrangementtransferssubstantiallyalltherisksandrewardsassociatedwiththeunderlyingassettothelessee.Forlessees,IFRS16eliminatesalmostalloff-balancesheetaccountingandintroducesasingleleaseaccountingmodelforlessees.Inpractice,forlesseesthismeansthatnodistinctionismadebetweenoperatingorfinanceleasesandthatallleasesarepresentedonthebalancesheetbylessees.Lessoraccountingremainslargelyunchanged.

ThedivergenceintheaccountingmodeloflesseesandlessorsunderIFRS16cannowresultintwoentitiesrecognizingassetsontheirbalancesheet(onetheunderlyingassetandtheothertherighttouseanasset).FinanceleasesunderIAS17requirealesseetorecognizeanassetheldunderafinanceleaseandacorrespondingobligationtopayrentals.Thepowersupplieraslessorwouldderecognizetheunderlyingassetandinturnrecognizealeasereceivable.Theresultingaccountingissimilartoasaleandfinancingarrangementastheriskandrewardsassociatedwiththeassetareassumedtobetransferredtotheoff-takerduetotheprovisionsinthePPA.Thepowersupplierisusuallynolongerexposedtorisksassociatedwiththequantitiesproducedbytheplant,pricevolatilityorotherrisksandrewardsassociatedwithasset.Itisonlyexposedtocreditriskandanyremainingresidualasset.Thepowersupplierwill,however,retainthelegalownershipoftheassetthroughouttheperiodofuse.Underanoperatinglease,thelesseedoesnotrecognizeanassetandleaseobligationanddoesrecognizeastraight-linedoperatingleaseexpense.Thepowersuppliercontinuestorecognizetheunderlyingassetanddepreciatesit.Therentalpaymentsreceivedarerecognizedbythepowersupplierasastraight-linerentalincome.Inthisscenario,thepowersupplierretainssubstantiallyalloftherisksandrewardsrelatedtothepowerplant.

AccountIng ImpAct

2IFRSdoesnotdefineEBITDAasafinancialperformancemeasure.However,itisfrequentlyusedininvestorpresentationsandpressreleasestoexpressacompany’sperformance.


B. Account for the wholecontract as a derivative oraccount for an embeddedderivative in the contractseparately (IFRS 9)

IFRS9definesaderivativeasafinancialinstrumentthatobtainsitsvaluefromanunderlyingpriceorindex,requireslittleornoinitialnetinvestment,andissettledatafuturedate.Derivativesare,uponinitialrecognitionandsubsequentbalancesheetdates,recognizedandmeasuredatfairvaluewithitsmovementsinfairvaluerecognizedinprofitorloss.Theseperiodicrevaluationscancausevolatilityintheincomestatement.PPAcontractscanmeetallthecharacteristicsofaderivative.Mostoftenentryintothecontractrequiresnoinitialpayment.Furthermore,thepricingagreementsinthecontract,suchasafixedprice,cappriceorfloorprice,willimpactthefairvalueofthecontractasthemarketpriceofpowerfluctuatesandthepricingagreementinthecontractbecomesfavorableorunfavorable.Lastly,thecontractissettledatafuturedateaspowerisdeliveredandpaidfor.IfaPPAcontractcontainsanembeddedderivativethatisnotcloselyrelatedtothehostcontract,theoff-takerneedstoaccountforthederivativeseparately,unlessthePPAcontractasawholeisalreadymeasuredatfairvalue.ThebifurcatedderivativeisaccountedforasaregularderivativeunderIFRS9atfairvalue,withchangesinthefairvaluerecognizedintheprofitandlossaccount.

AccountIng ImpAct

Example–EmbeddedderivativesUsingthesamesituationasintheinitialexample,assumenow that Company X andWindmill Park Y specified thefollowing in the PPA contract: Company X will consume25,000MWh per year in the coming 15 years at theprevailingmarket price at the delivery date. However,thepurchase price cannot exceed CU 55 perMWh (cap) or fallbelow the price of CU 35 perMWh (floor). Both the floorand the cap are options and thus derivatives. Their valuedepends on themarket price for power. We assume thatno initial or little investment is made for the option and thatthe PPA contract as a whole is notmeasured at fair value.ThecapincludedinthecontractisbeneficialforCompanyX, since it knows beforehand that even if the variableenergy pricemoves up to CU 60 perMWh, it will not paymore than CU 55 perMWh for the next 15 years. On theother hand, the floor included in the contact is beneficialforWindmill Park Y, since it ensures that they will get CU35 perMWh at aminimum even if the price drops belowCU 35 perMWh.UnderIFRS,thecompanyneedstoseparatetheembedded derivatives from the PPA contract if thecapor floor is in themoney at the PPA contract’s inception.Therefore, if themarket price for power for the periodwithin the scope of the PPA contract is belowCU 35 perMWh or above CU 55 perMWh, one of the embeddedderivatives is in themoney. If the embedded derivativeisnot in themoney, the company does not need to separateit and has to account for the contract as a regularpurchase contract (reference ismade to section C).

Example–Fullcontractisinscope for IFRS 9 Usingthesamesituationasintheinitial example, assume the powerusage requirement of Company X isonly 15,000MWh per year; therefore,it is expected that the company willhave a surplus of 10,000MWh. Thissurplus is sold back to themarket inexchange for the then listed (variable)energy price.ForCompanyXthiscontractcanbe beneficial since all price volatilityrelated to the power consumed isremoved from its income statement.However, by committing to buy allthe energy produced byWindmillPark Y, Company X has committedtobuyingmore power than is requiredduring its ordinary business; thus, thecompany cannot apply the own-useexemption and the full contract isconsidered within the scope of IFRS9and accounted for as a derivative. Thecompanymeasures the derivative atfair value and recognizes changes tothe fair value in the income statement.Hedgeaccountingrelationshipscan designate PPA contracts as ahedging instrument.


Determiningthefairvalueofaderivativeisusuallycomplexandoftenrequirestheinvolvementofvaluationspecialistsaswellasmarketdataavailability.Giventhelong-termnatureofPPAs,thelattercansometimesbealimitationasliquidpowermarketsareoftennotavailableforperiodsbeyondfiveyears.Awiderangeofvaluationtechniquesexiststhatmayneedtobeusedinvaluing(embedded)derivatives.Commontechniquesincludediscountedcashflowanalysesforderivativeswithoutoptionalitywhileoptionalitiesarevaluedwithoption-pricingtechniques:formulas(Black-Scholestypemodels),binomialtreesorsimulations.

c. Account for a PPA as a“normal” executory contract(IAS 37)

Formostoff-takers,accountingforaPPAasanexecutorycontractisthedesiredaccountingmethod.Itissimpleandithaslessaccountingimpact.Theexpensesareincludedintheincomestatementbasedonthecostsattributabletothepowerdeliveredtoandconsumedbytheoff-takerintheirordinarycourse ofbusiness.

However,basedonthelong-termnatureofaPPA,itcouldbecomeanonerouscontractifpowerpricesdecreasesignificantly.Onerouscontractsaredefinedascontractsinwhichtheunavoidablecostsofmeetingtheobligationsunderthecontractexceedtheeconomic

benefitsexpectedtobereceivedunderit.AcontractisnotnecessarilyonerousifonlythePPApowerpriceexceedsthemarketpricebecausetheoff-takerneedstoconsidertheeconomicbenefitsasawhole,includingtheeconomicbenefitsofthePPAfortheoff-takerasrelatestopowerusage,forexampleinaproductionprocess.Iftheproductsarestillsoldataprofit,thecontractisnotonerous.Itisalsoimportanttonotethatinassessingwhetherproductsarestillsoldataprofit,theoff-takershouldnottakefixedoverheadcostsintoaccountifthesecostswouldbeincurredirrespectiveoftheonerouscontractandthusshouldnotincludethesecostsinanonerouscontractprovision.However,ifthecostsareclearlyincrementalanddirectlyrelatedtosupportofthecontract,theoff-takershouldincludethemintheonerouscontractprovision.Ifanentityhasacontractthatisonerous,itshallrecognizeandmeasurethepresentobligationunderthecontractasaprovisionbasedonwhicheverofthetwofollowingamountsislowest:• Theamounttobepaidascompensationforexiting

thecontract;or• Thediscountedamountofthedifferencebetween

thepurchaseobligationsandtheamountoftheeconomicbenefits(forexampletheprofitmarginontheproductstobeproducedwiththepower)fortheremainingcontractterm.

AccountIng ImpAct

Example–ExecutorycontractBasedonthefactsandcircumstancesof the initial example, this contract is anexecutory contract. The company chargesa yearly amount of CU 450,000 to the profitand loss account.


D. Consolidate the projectentity and eliminateintercompany PPA

Sometimesoff-takersalsoparticipateinthedevelopmentofnewrenewablepowerproductionfacilities,whichresultsintheadditionalityofrenewableenergygeneration.Iftheyprovidefundingtotheprojectentity,thequestionishowthatcouldimpacttheaccountingfortherelatedPPAbetweentheoff-takerandtheprojectentity.Iftheoff-takercontrolstheprojectentity,thefinancialinformation,includingallprojectentitypowergenerationassetsandliabilities,hastobefullyincludedintheoff-taker’sconsolidatedfinancialstatements.Anypotentialinterestofminorityshareholdersisincludedaspartofthegroupequityoftheoff-taker.Theconsolidationofaprojectentitycansignificantlyimpacttheoff-taker’sfinancialstatements,includingrelevantkeyperformanceindicatorssuchassolvencyratios,EBITDAandinterestcoverratios.Initsconsolidatedfinancialstatements,theoff-takershouldeliminatethePPAbecausethisrelatestotransactionsbetweencompanieswithinthesamegroup.However,theoff-takerstillhastoaccountforanddisclosethePPAonthefinancialstatementsasarelatedpartytransactioninaccordancewithIAS24.Toensure

accurateaccountinginitsfinancialstatements,theoff-takerhastoanalyzethePPAonissuesintheareasofleaseaccountingandfinancialinstrumentaccountinglikeanyotherPPAwithanunrelated/thirdparty.

e. Recognize assets/liabilitiesand eliminate the PPA

Incaseswheretheshareholdingintheprojectentityisajointoperation,theoff-takershallrecognizeinrelationtoitsinterestinajointoperation(IFRS11.20):• Itsassets,includingitsshareofanyassetsheld

jointly;• Itsliabilities,includingitsshareofanyliabilities

incurredjointly;• Itsrevenuefromthesaleofitsshareoftheoutput

arisingfromthejointoperation;• Itsshareoftherevenuefromthesaleoftheoutput

bythejointoperation;and• Itsexpenses,includingitsshareofanyexpenses

incurredjointly.

Similartoconsolidation,theoff-takerhastoeliminatethePPAitself,asthepowersupplyrelatestoownassets.

AccountIng ImpAct


F. Account for the project entity based on the equity method

Incaseswheretheoff-takeriseitheraccountingforitsinvesteeasajointventureorasanassociate,undertheequitymethod,theoff-takerinitiallyrecognizesitsinvestmentinanassociateatcostandincreasesordecreasesthecarryingamounttorecognizetheinvestor’sshareoftheprofitorlossoftheinvesteeafterthedateofacquisition.Theoff-takerrecognizesitsshareoftheprofitorlossoftheprojectentityinitsprofitorloss.Distributionsreceivedfromaprojectentityreducethecarryingamountoftheinvestment.Adjustmentstothecarryingamountmayalsobenecessaryforchangesintheoff-taker’sproportionateinterestintheprojectentityarisingfromchangesintheprojectentity’sothercomprehensiveincome(IFRS11.24andIAS28.11).Whenapplyingtheequitymethod,theoff-takerusesitsownaccountingpolicies.Ifanassociateorajointventureusesaccountingpoliciesotherthanthoseoftheoff-takerforliketransactionsandeventsinsimilarcircumstances,theassociate’sor

jointventure’saccountingpoliciesshallbeadjustedtomakethemsimilartothoseoftheoff-takerwhentheentityusestheassociate’sorjointventure’sfinancialstatementsinapplyingtheequitymethod.Becausetheoff-takerhasaPPAwithanunconsolidatedentity,thecontractdoesnotrelatetoanintercompanytransaction.Theoff-takeraccountsforthePPAbasedonallrelevantIFRSstandards.Initsfinancialstatements,theoff-takershouldeliminateitsshareinanyprofitsrealizedbytheprojectentityonupstreamtransactionsbetweentheoff-takerandtheprojectentity.Theassociateorjointventuremightsellpowertotheoff-takerortootherpartsoftheinvestor’sconsolidatedgroup.Theoff-takershouldeliminateanyunrealizedprofitsfromtheseupstreamtransactions,totheextentoftheoff-taker’sinterestintheassociate,untilthetransactionhasbeencrystallizedbyanonwardsaletoathirdparty.Theentityeliminatesitsshareoftheprofitagainstthecarryingamountoftheassociate.Theaccountingentriesaretodebittheshareofprofitoftheassociateandtocredittheinvestmentintheassociate.

G. Account for project entity as a financialinstrument(IFRS9)

Incaseswheretheoff-takerhaslessthansignificantinfluenceovertheprojectentity,itmeasurestheinvestmentatfairvaluebasedonIFRS9.UnderIFRS9,theoff-takeraccountsforthisinvestmentinequityinstrumentsasaninvestmentatfairvalue,withthefairvaluechangesrecognizedintheprofitandlossaccountunlessitusesthefairvaluethroughtheothercomprehensiveincome(OCI)option.Hencewhenanoff-takerconcludesitonlyhasanequityinvestment,itneedstofairvaluetheseequityinvestmentsateverybalancesheetdate,whichresultsinvolatilityintheprofitandlossaccounttoacertainextent.Becausetheoff-takerhasaPPAwithanunconsolidatedentity,thecontractdoesnotrelatetoanintercompanytransaction.Theoff-takeraccountsforthePPAbasedonallrelevantIFRSstandards.

AccountIng ImpAct


WBCSD’s REscale business solutionThroughREscale,leadingcompaniesareworkingtogetheronsolutionstoacceleratethedeploymentofrenewablesbeyondaveragegrowthandtransitiontoalow-carbonelectricitysystem.Thegroupsharestheviewthatrenewableenergyisreliableandincreasinglycompetitive,andthat3.5TWofcapacitycanbedeployedby2025.3

In2016,REscalepublishedthereport‘CorporateRenewablePowerPurchaseAgreements:Scalingupglobally’thatguidescompaniesthroughtheprocessofprocuringrenewablepowerviaPowerPurchaseAgreements(PPAs).ThisreportcontinuesourworkfocusingontheIFRSaccountingoutlineforPPAstoincreaseawareness,understandinganduseofCorporateRenewablePPAs.TheplatformundertakingthisworkiscalledtheglobalCorporateRenewablePPAForum.

TofindoutmoreaboutREscale,theglobalCorporateRenewablePPAForumandpreviousreports,visitourwebsite.

About the World Business Council for Sustainable Development (WBCSD)WBCSDisaglobal,CEO-ledorganizationofover200leadingbusinessesandpartnersworkingtogethertoacceleratethetransitiontoasustainableworld.Wehelpmakeourmembercompaniesmoresuccessfulandsustainablebyfocusingonthemaximumpositiveimpactforshareholders,theenvironmentandsocieties.

Ourmembercompaniescomefromallbusinesssectorsandallmajoreconomies,representingcombinedrevenuesofmorethan$8.5trillionand19millionemployees.Ourglobalnetworkofalmost70nationalbusinesscouncilsgivesourmembersunparalleledreachacrosstheglobe.WBCSDisuniquelypositionedtoworkwithmembercompaniesalongandacrossvaluechainstodeliverimpactfulbusinesssolutionstothemostchallengingsustainabilityissues.Together,wearetheleadingvoiceofbusinessforsustainability:unitedbyourvisionofaworldwheremorethan9billionpeoplearealllivingwellandwithintheboundariesofourplanetby2050.

www.wbcsd.org

FollowusonTwitterandLinkedIn

DisclaimerThispublicationisreleasedinthenameoftheWorldBusinessCouncilforSustainableDevelopment(WBCSD).ThisdocumentistheresultofacollaborativeeffortbetweenWBCSD,PwCandrepresentativesfromcompaniesparticipatingintheglobalCorporateRenewablePPAForum.

AwiderangeofWBCSDmembersreviewedthematerial,therebyensuringthatthedocumentbroadlyrepresentsthemajorityviewoftheglobalCorporateRenewablePPAForum.

Itdoesnotmean,however,thateverycompanywithintheforumagreeswitheveryword.

Thereporthasbeenpreparedforgeneralinformationalpurposesonlyandisnotintendedtoberelieduponasaccounting,tax,legalorotherprofessionaladvice.

Authors and contactsWe thank PwC and in particular its lead authors:

Gert-JanBrouwerJurianGoei

AcknowledgementsTheglobalCorporateRenewablePPAForumhasbroughttogethercompaniesfromdifferentindustriesandmarketstocollaborativelydevelopthisreport.Wewishtothankthefollowingpeoplefortheircontributionsandthought-leadership:

• AkzoNobel:JoostSandberg

• Nestlé:CynthiaKohuska

• Solvay:AlexisManuel

TheglobalCorporateRenewablePPAForumcurrentlyconsistsofthefollowingcompaniessupportingthisreport:

3The3.5TWfigureisbasedontheInternationalEnergyAgency’s2°scenario.

TocontactWBCSDaboutthisreport: mariana heinrich Manager,Climate&Energy [email protected]

ForgeneralenquiriesatWBCSD: RasmusValanko Director,Climate&Energy [email protected]

https://twitter.com/wbcsd

https://www.linkedin.com/company/41533?trk=pro_other_cmpy


WorldBusinessCouncil for Sustainable DevelopmentMaisondelaPaix Chemin Eugène-Rigot2BCP2075,1211Geneva1Switzerland www.wbcsd.org

http://www.wbcsd.org

ifrs accounting outline for power purchase agreements · leases (ifrs 16) instead of ias 17 —...

Documents