The International Accounting Standards Board (IASB) has issued narrow-scope amendments to IFRS 9 Financial Instruments and IFRS 7 Financial Instruments: Disclosures in an effort to address the growing challenge of accounting for nature-dependent electricity contracts, often structured as power purchase agreements.

The scope of the amendments is limited to contracts referencing nature-dependent electricity, where the electricity source depends on uncontrollable natural conditions, such as the weather, which expose an entity to variability.

Contracts referencing nature-dependent electricity include those to buy or sell it as well as financial instruments that reference such electricity. Variability in volumes delivered can often make it challenging to apply IFRS 9 to contracts with these features, so the amendments are intended to help companies better report the financial effects of such contracts, ensuring that financial reporting evolves alongside developments in the energy market. 

To reflect the characteristics of the contracts within the scope of the amendments, use of the term ‘nature-dependent electricity’ in the finalised amendments is a change from the earlier exposure draft, which used the term ‘contracts for renewable electricity’. 

The IASB has focused on three key areas of IFRS 9: 

Own-use exemption

IFRS 9 excludes certain contracts for non-financial items from its scope, if they are for an entity’s own expected purchase, sale or usage requirements. This is often referred to as the ‘own-use’ exemption.

The amendments are intended to address challenges entities face in applying the own-use exemption to nature-dependent electricity, where fluctuations in volume can result in excess electricity being sold back to the market despite the contract being intended for an entity’s own use.

The amendments clarify how an entity should apply the own-use exemption to contracts referencing nature-dependent electricity. They introduce specific factors that an entity must consider, including whether it is a net purchaser over a reasonable time frame. These contracts may qualify as own-use depending on the assessment of these specific factors.

Hedge accounting 

The difficulties in applying IFRS 9 to nature-dependent electricity contracts extend beyond the own-use exception. If the contract is accounted for as a derivative, an entity may look to apply hedge accounting. However, the variable volume of electricity generated under these contracts can make application of hedge accounting challenging and ineffective. To address this, the amendments permit companies to designate a variable nominal volume of forecasted sales or purchases of renewable electricity as the hedged item, subject to certain conditions. 

Disclosure 

The amendments to IFRS 7 require entities to provide additional disclosures for contracts accounted for as own-use under these amendments. Entities are required to disclose information relating to: 

• the contractual features exposing the entity to variability in electricity volume and the risk of having to buy electricity beyond the entity’s usage requirements;
• unrecognised commitments arising from such contracts as at the reporting date, including the estimated future cash flows from buying electricity under these contracts;
• qualitative information about how the entity assesses whether a contract might become onerous; and
• qualitative and quantitative information about effects of the contract on the entity’s financial performance for the reporting period, including the costs and proceeds associated with purchases and sales of electricity.

For contracts in scope designated as hedging instruments, the amendments require entities to disaggregate the information about terms and conditions of hedging instruments required by IFRS 7, by risk category. 

The amendments are effective for annual reporting periods beginning on or after 1 January 2026, with earlier application permitted subject to local endorsement.

Georgina Chalk, Technical Manager in ICAEW’s Corporate Reporting Faculty, says: “ICAEW welcomes the amendments as a response to the challenges entities face when applying IFRS 9, especially given the growing prevalence of contracts for renewable electricity. We are particularly pleased to see that the scope of the disclosure requirements has been limited to contracts applying the proposed amendments, a change that ICAEW called for during the consultation process.”