Here’s an item from the June 2023 IFRIC Update:

• The Committee discussed a request about applying paragraph 2.4 of IFRS 9 to physical delivery contracts to buy energy. The Committee observed that the purchase of renewable energy such as solar and wind via long term energy contracts with physical delivery is widespread and is increasing as renewable energy generation also increases. The request states that entities are experiencing application challenges and questions when applying the requirements in IFRS 9 particularly due to the unique characteristics of the renewable energy market and the related features of the long-term physical delivery contracts.
• The Committee recommended the International Accounting Standards Board (IASB) consider undertaking a narrow-scope standard-setting project that addresses the application of paragraph 2.4 of IFRS 9 to some physical power purchase agreements to buy energy. Such a project could for example focus on contracts for the purchase of a non-financial item that are capable of being settled net in cash, where the underlying non-financial item cannot be stored and has to either be consumed or sold within a short time in accordance with the market structure in which the item is bought and sold.

You’ll recall that the cited paragraph of IFRS 9 excludes from the scope of the standard contracts “that were entered into and continue to be held for the purpose of the receipt or delivery of a non‑financial item in accordance with the entity’s expected purchase, sale or usage requirements.”

The underlying submission sets out a few of the application challenges referred to, for example:

• To secure the entity’s own demand for energy from renewable sources, the entity enters into a physical power purchase agreement (PPA) with a wind park operator (both the producer and operator are connected to the same grid). The contract obliges the entity to acquire a fixed share of the energy produced (for example 50 per cent of the production) at the time it is produced and at a price per unit of energy that is fixed throughout the contract duration of 25 years. When the energy is produced, the energy provider feeds the energy produced to the grid and transfers the ‘energy credits’ to the account of the entity in exchange for the fixed price per unit.
• The total energy demand of the entity by far exceeds both the contracted share of the estimated output and the contracted share of the peak output of the wind park. However, the entity does not operate its production facilities 24/7 but pauses production during the night times, on weekends and holiday season. There is therefore a mismatch between the demand profile of the entity and the supply profile of the wind park and there will be times when the entity is unable to consume the energy when it is delivered (ie over weekends or during the night when facilities are closed).
• As there are no feasible option to store the energy, the entity has to sell unused amounts from its account to third parties. The process of selling and repurchasing is delegated to a service provider for a fixed or formula-based fee and is designed to be on autopilot that acts without the intention of trading to realize profits. The sole purpose of this is to enable the entity’s operations. There is no explicit net settlement option within the contract.

So given the “mismatch” and the other factors cited, is that a structure entered into solely to satisfy the entity’s own usage requirements?  The staff analysis concludes that IFRS 9 lacks sufficient application guidance on this point. Areas of uncertainty include  to what extent the market structure in which a non-financial item is transacted is relevant to determining an entity’s own usage requirements; the period over which an entity’s expected usage requirements needs to be evaluated when delivery could occur on a near-constant basis; and to what extent transactions in the spot market subsequent to delivery indicate that a PPA is or isn’t for the purpose of an entity’s own usage requirements. As noted, the committee recommends that the IASB should provide greater clarity on this and related issues. So we’ll have to wait and see.

The issue is interesting in itself, and provides yet another example of how standards written primarily for a familiarly tangible world come under strain in our current one. CPA Canada’s forthcoming annual conference has a panel titled “The Changing Landscape of our Capital Markets: Cryptocurrency, Financial Statement Evolution, ESG, and more (“Rapid changes in technology, the evolving information needs of investors, climate change and emerging industries are having a profound affect (sic) on our capital markets….”). In some ways those “changing landscape” items are distinct; in other ways of course, nothing is. For the most part these profound affects are being dealt with for now through relatively incremental changes to our existing models. Will that always be sufficient…?

The opinions expressed are solely those of the author.