IFRIC recently considered the following fact pattern:

• a battery owner and an electricity retailer are registered participants in a gross pool electricity market.
• The battery owner and the electricity retailer enter into a battery offtake arrangement. Under the terms and conditions of the offtake arrangement, the battery owner retains custody of the battery but is contractually obliged to operate it in accordance with the electricity retailer’s instructions, which cover 100% of the capacity of the battery; the battery cannot be substituted. The electricity retailer’s instructions would typically specify whether and when the battery owner charges and discharges the battery. The electricity retailer can instruct the battery owner to charge and discharge the battery throughout the period of use (including multiple times during each day).
• In a gross pool electricity market, settlement of electricity transactions requires a single registered participant to transact with the market operator. As the battery owner is the registered participant, transactions occurring under the offtake arrangement are settled as follows:

• (a) the electricity retailer pays a fixed amount to the battery owner over the period of the contract for the right to use the battery. This fixed amount reflects the size of the battery and the period of use and is payable regardless of whether the battery is charged or discharged.
• (b) the battery owner operates the battery according to the electricity retailer’s instructions by buying and selling electricity and settles those transactions with the market operator. In accordance with the gross pool market structure, all transactions with the market operator occur at the spot price. The battery owner pays the resulting cash flows to (or receives the resulting cash flows from) the electricity retailer.
• (c) the battery owner and the electricity retailer settle transactions in (a) and (b) periodically, net in cash.

The underlying staff paper observes: “there is a growing prevalence of battery storage and offtake arrangements…Such arrangements are common in the utility industry and are expected to increase significantly in the near future (as well as) outside of the utility industry as batteries form a critical part of entities’ plans to transition to renewable electricity generation and reduce greenhouse gas emissions.” These arrangements are increasingly likely, it observes, to be material to the financial statements.

IFRS 16.9 states that “a contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration.” For a contract to convey such a right, the customer—throughout the period of use—must have both the right to obtain substantially all of the economic benefits from use of the identified asset; and the right to direct the use of that asset. The requests made to IFRIC, underlying the above fact pattern, assumed that the latter was clear, but asked about the analysis of the former. A possible view set out in the requests is that, in part, the battery’s storage capacity “has no value without the physical output into the gross pool market and as such, the economic benefits are tied to the electrons flowing from the battery. As the registered participant for the battery, the battery owner has the ultimate responsibility to the market operator and legal title to the electricity stored and discharged from the battery.” Further, as noted in one of the submissions:

• The customer’s primary motivation is energy price arbitrage, akin to financial derivatives such as PPAs and Virtual Power Plants (VPPs). Crucially, the net settlement mechanism reinforces this derivative-like nature: rather than simply using the asset, the customer manages price exposure and settles energy costs without taking physical delivery. This structure aligns with IFRS 9’s definition of a derivative – a financial instrument where value fluctuates based on an underlying variable (energy prices) and is settled without physical transfer. Unlike leases, where the primary benefit lies in asset usage, the…agreement operates as a financial tool for risk mitigation and speculation, often within a portfolio of generation assets and contracts.

IFRIC didn’t go down that road though, instead adopting the staff view: “A battery cannot generate electricity in its own right. Similar to a pipeline or a warehouse, a battery has value because of its storage capacity and ability to receive and release the items to be stored. The stored items themselves are neither the output nor economic benefits.” Building on that, the Committee observed that the battery offtake arrangement provides the electricity retailer with the economic benefits derived from the battery storage because the electricity retailer has the exclusive right to use the entire capacity of the battery throughout the period of use (for the duration of the arrangement); and to direct the battery owner as to whether, when and by how much to charge and discharge the battery.

The Committee therefore tentatively concluded that the electricity retailer has the right to obtain substantially all of the economic benefits from use of the battery, and that lease accounting is appropriate. The deadline for commenting on the tentative decision is November 25, 2025. Like many issues arising from modern technology and commerce, the accounting analysis depends on staking out a position regarding various concepts, such as “control” and “economic benefits,” which may be distinctly easier to analyze in the old world economy. Without disputing IFRICs technical analysis, I’m not entirely convinced that financially complex arrangements of the kind described above wouldn’t best be measured at their fair value, with all the attendant volatility and disclosure…

The opinions expressed are solely those of the author.