5 Contracts Referencing Nature-dependent Electricity

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30 January 2025 Agenda Paper 5 UKEB UK Endorsement Board

Executive Summary

Project Stage

IASB	Research / Pipeline	Discussion paper	Redeliberation	Exposure Draft	Redeliberation	Final standard	Post Implementation Review
UKEB	Research / Influencing	Research / Influencing	Monitoring	Influencing	Monitoring	Endorsement	Influencing

Project Scope

Moderate

Purpose of the paper

On 18 December 2024 the International Accounting Standards Board (IASB) concluded its narrow-scope standard setting project on Power Purchase Agreements (PPAs) and published Contracts Referencing Nature-dependent Electricity – Amendments to IFRS 9 and IFRS 7 (the amendments).

At its December 2024 meeting, the UKEB approved the Project Initiation Plan for the endorsement of these amendments. As part of the approved approach and plan for the project, it was agreed that the Board would have the opportunity for a technical discussion of the amendments at its January 2025 meeting.

The purpose of this paper is to provide an overview of the amendments and highlight any significant changes from the Exposure Draft Contracts for Renewable Energy (ED), published in May 2024. This information is presented to the Board to facilitate a technical discussion which will inform the Draft Endorsement Criteria Assessment. Minor amendments to IFRS 9 Financial Instruments (IFRS 9) and IFRS 7 Financial Instruments: Disclosures (IFRS 7) and consequential amendments to other IFRS Accounting Standards are not covered in this paper.

The paper includes a summary of the Secretariat's analysis of the key changes from the ED. Additionally, the paper presents the Secretariat's initial assessment of the extent to which any of the issues identified during the project to date, including in the influencing phase, may represent potential consideration for endorsement.

Summary of the Issue

The key changes and requirements introduced by the amendments ¹ are summarised below.

1The amendments apply only to contracts which reference nature-dependent electricity. Such contracts expose an entity to variability in the contracted volume of electricity which is generated from natural sources which cannot be controlled. 2The amendments extend the 'own-use' exception as set out in paragraph 2.4 of IFRS 9 to contracts to purchase nature-dependent electricity which meet certain conditions. 3Entities are permitted to apply cash flow hedge accounting to hedging relationships in which the hedged item is a variable amount of forecast electricity transactions and the hedging instrument is a contract referencing nature-dependent electricity. 4Entities are required to disclose information about their contracts referencing nature-dependent electricity.

Decisions for the Board

The Board is not asked to make any decisions but is invited to share views on any of the following:

Appendix A

Do Board members have any comments or questions on the scope of the amendments, as summarised in Appendix A?
Do Board members agree with the Secretariat's preliminary assessment of the scope of the amendments set out in the table at the end of Appendix A?
Do Board members have any comments or questions on the own-use amendments or the net-purchaser assessment, as summarised in Appendix A?
Do Board members agree with the Secretariat's preliminary assessment of the own-use amendments set out in the table at the end of Appendix A?

Appendix B

Do Board members have any comments or questions regarding the hedge accounting amendments, as summarised in Appendix B?
Do Board members agree with the Secretariat's preliminary assessment of the hedge accounting amendments set out in the table at the end of Appendix B?
Do Board members have any comments or questions regarding the disclosure elements of the amendments, as summarised in Appendix B?
Do Board members agree with the Secretariat's preliminary assessment of the disclosure amendments set out in the table at the end of Appendix B?

Overarching question

Do Board members wish to highlight any aspects of the amendments summarised in the Appendices where further technical work or clarification should be considered by the Secretariat in drafting the Draft Endorsement Criteria Assessment for the February 2025 UKEB meeting?

Recommendation

Not applicable.

Appendices

Appendix A Scope of the amendments and 'own-use' amendments
Appendix B Hedge accounting amendments, disclosure requirements, and effective date and transition requirements

Background to the amendments

In June 2023, the IFRS Interpretations Committee (IFRIC) received a submission regarding the application of paragraph 2.4 of IFRS 9 (the 'own-use' exception ²) to certain contracts for the procurement of renewable energy, commonly known as physical PPAs ³. As a result, a recommendation was made to the IASB to develop a narrow-scope amendment to address the issue.

In considering the issue, IFRIC received feedback from stakeholders that similar application questions arise when accounting for virtual PPAs ⁴. The IASB noted that resolving these issues for virtual PPAs is more complex, because they are derivative contracts, but expressed a view that hedge accounting might be a potential solution to better reflect the purpose and objectives of virtual PPAs ⁵.

Consequently, the IASB added a narrow-scope standard setting project to the workplan, to develop amendments to permit certain PPAs to meet the own-use and hedge accounting requirements and require entities to provide relevant disclosure ⁶.

The IASB's proposals were set out in the ED, published on 8 May 2024 with a 90-day consultation period ending on 7 August 2024. The UKEB submitted its Final Comment Letter on the ED to the IASB on 6 August 2024.

The IASB published the final amendments to IFRS 9 and IFRS 7 on 18 December 2024.

Appendix A: Contracts Referencing Nature-dependent Electricity - scope and own-use

(i) Scope

A1The scope of the amendments is set out in paragraphs 2.3A and 2.3B of IFRS 9. A summary of the key changes between the Exposure Draft Contracts for Renewable Electricity (ED) and the final amendments is included in the table at the end of this paper. A2The scope of the amendments is limited to contracts which reference nature-dependent electricity. Such contracts expose an entity to variability in the contracted volume of electricity, because the electricity is generated from natural sources which cannot be controlled e.g., the weather. A3Both physical ⁷ and virtual ⁸ power purchase agreements (PPAs) could be in scope of the amendments. A4Although contracts within the scope of these amendments often include renewable energy certificates (RECs), the amendments do not address the accounting for RECs. A5The amendments shall not be applied to any contract, item or transaction other than contracts referencing nature-dependent electricity.

Secretariat analysis

A6PPAs are often contractually complex and can vary significantly by jurisdiction and according to the structure and operation of the relevant energy market. Therefore, the challenge for the International Accounting Standards Board (IASB) in developing the amendments has been to ensure that they are clearly and consistently understandable by all entities applying them. A7For example, respondents to the ED asked the IASB to explain the meaning of 'nature-dependent' electricity ⁹, and there has been some debate amongst members of the IASB as to whether nature (or natural forces) can be said to control the source of electricity production. In relation to whether a contract exposes an entity to the risk of exposure to variability in contracted volume (see paragraph A2), stakeholders asked the IASB to clarify the extent to which they needed to consider mechanisms to mitigate this risk, for example through contractual features such as 'caps' and 'floors' and contracts with intermediaries to smooth intermittent supply of electricity ¹⁰. A8In drafting the amendments, the IASB has emphasised ¹¹ the importance of assessing the substance of contractual rights and obligations (including for contracts with intermediaries) to determine the appropriate accounting. Entities may have to use judgement to determine whether or not their contracts are in scope of the amendments. A9The IASB has however provided some clarification relating to the exposure to variability, to indicate that contracts with certain risk mitigation features, such as caps and floors, are capable of being within the scope of these amendments ¹². A10Initial feedback from the Financial Instruments Working Group and other stakeholders is broadly supportive of the amendments, acknowledging that several concerns raised in relation to the ED have been addressed. No significant concerns have been drawn to our attention in relation to the scope of the amendments. A11The table at the end of this paper includes a summary of the key changes between the ED and final amendments, and the Secretariat's initial assessment of considerations for endorsement.

Questions for the Board

Do Board members have any comments or questions on the scope of the amendments?
Do Board members agree with the Secretariat's preliminary assessment of the scope of the amendments set out in the table at the end of this paper?

(ii) The own-use exception

The own-use assessment

A12Paragraph 2.4 of IFRS 9 states that the own-use exception applies where the relevant contract was entered into and continues to be held in accordance with an entity's expected purchase, sale ¹³ or usage requirements (emphasis added). A13It follows that a contract that was entered into for any purpose other than to meet an entity's expected purchase, sale or usage requirements cannot be said to meet the own-use exception at a later date due to a change in circumstances. A14In addition, where a contract meets the own-use exception at inception, an entity must make a continuous assessment of whether the contract continues to be held in accordance with an entity's expected purchase, sale or usage requirements. If this is no longer the case, then the contract will fall into scope of IFRS 9 for the remainder of its duration.

Amendments to the own-use exception

A15A summary of the key changes between the ED and the amendments is included in the table at the end of this paper. The IASB has added application guidance at B2.7 – B2.8 to clarify "when sales of electricity during the contract period are still in accordance with the entity's expected electricity usage requirements” ¹⁴. In summary, sales under a contract within the scope of the amendments are not necessarily inconsistent with meeting the own-use exception at paragraph 2.4 of IFRS 9 if the entity has been, and expects to be, a net purchaser of electricity for the contract period. A16Paragraph B2.8 explains that in assessing whether it has been and expects to be a net purchaser, an entity shall consider reasonable and supportable information available without undue cost or effort and make the assessment over a reasonable period of time. The guidance further explains that in relation to past purchases, a reasonable amount of time shall not exceed 12 months. A17Further explanation is provided in the amendments to the Basis for Conclusions on IFRS 9, which states at BC2.18H that the IASB intends a reasonable period of time to typically be a short period but introduced the 12-month limit to allow for seasonal cycles of production for some types of nature-dependent electricity. A18These amendments do not alter the 'one way' application of the own-use rules (see paragraphs A13 and A14). Other than at the initial application of these amendments, an entity is required to make the own-use assessment at inception of the contract and continue to assess whether it meets this test over the life of the contract. If at any point a contract fails the own-use test, it must be accounted for at fair value thereafter for its remaining duration. A19Except at the initial application of these amendments, there are no circumstances in which a contract within the scope of these amendments could move from fair value to own-use. A20As explained in Appendix B, the transitional requirements for the own-use elements require retrospective application using the facts and circumstances at the date of initial application.

Secretariat analysis

A21It is expected that certain physical PPAs for receipt of electricity which were previously recognised as derivatives on the balance sheet will now be accounted for as executory contracts ¹⁵. In effect, certain contracts previously considered to fail own-use may now meet the own-use exception as a result of the amendments. A22Contracts referencing nature-dependent electricity are typically bespoke, complex, and may have a very long term. A few respondents to the ED considered that fair value measurement provides the most useful information about those risks ¹⁶. Paragraph 7 of the UKEB Final Comment Letter (FCL) stated that discussions with UK stakeholders had not revealed any “clear technical arguments in favour of applying 'own use' treatment to the defined contracts.” However, feedback from UK stakeholders was supportive of the own-use amendments given the practical and operational challenges in obtaining reliable valuations for these highly complex and long-term contracts. In addition, we have heard nothing to suggest that UK investors prefer fair value treatment for these contracts. This is consistent with feedback received by the IASB from investors, that fair value accounting for physical PPAs “does not provide useful information about the performance of the entity." ¹⁷ A23A number of the IASB's stakeholders (including the UKEB) have recognised the importance of adequate disclosure, to enable investors and management to understand the long-term cash flows under the contracts and the risks they entail ¹⁸.

Possible impacts of availability of storage

A24The way in which electricity markets operate and related contracts are structured is likely to change. Although it is difficult to anticipate what those developments will be with any certainty, one aspect which has been referred to in discussions on this project is the availability of storage ¹⁹. The UKEB Secretariat's initial view is that if electricity storage becomes available and economically feasible in a particular market, then the amendments may become less important, or may no longer be required in relation to new contracts. A25However, this will depend to a large extent on which entity in the supply chain controls any storage ²⁰, and the extent to which existing contracts which have 20-25 years remaining are affected by these developments. A26From our engagement with industry experts, it is not expected that large battery storage capacity will be technologically or economically viable for large corporate consumers of power (e.g. retailers, those with large data centres) in the near to medium term. Therefore, for those entities currently party to contracts within the scope of the amendments, we do not expect their need for these amendments to be significantly altered in the short to medium term. A27In addition, feedback we have received indicates that developments in battery storage may allow renewable generators, or other intermediaries, to provide services to smooth the supply of electricity into the grid. These developments may also facilitate the development of new contracts that are more closely aligned with the power needs of end users. It is possible that over time this may reduce the need for these amendments as new contracts are entered into. However, given the long-term nature of some existing contracts, this is not expected to change the landscape within the short term.

Dissenting opinions

A28Two IASB members (Bruce Mackenzie and Robert Uhl) dissented from approving the amendments for issue. A29Mr Mackenzie and Mr Uhl are of the view that the amendments would permit “an exception from IFRS 9 for situations in which an entity knows it will settle net portions of the contract” at inception of the contract ²¹. This might result in misleading information for users of accounts ²². A30Mr Mackenzie and Mr Uhl also consider that the amendments contain more lenient requirements for contracts referencing nature-dependent electricity than for other contracts for non-financial items, raising questions about whether the accounting requirements result in a neutral ²³ depiction of the relevant financial information. A31The UKEB FCL expressed concerns about a departure from principle-based accounting. The letter noted that the “proposed departure from principle-based accounting associated with the introduction of an exception to an existing exception within IFRS 9 risks introducing additional complexities to the accounting requirements and the creation of unintended consequences.” ²⁴ The UKEB's FCL notes that discussions with stakeholders in the influencing stage of the project did not yield any clear technical arguments in favour of applying own-use treatment to contracts in scope of the amendments (paragraph 7 of the FCL). However, the UKEB recognised the demand from UK stakeholders for a pragmatic accounting solution given the increase in usage of contracts referencing nature-dependent electricity and the difficulty of obtaining fair valuations for such contracts. In addition, investors are not calling for fair value treatment for these contracts (paragraph 8 of the FCL). A32It should also be noted that the own-use amendments are targeted at those contracts which are entered into for the purchase of nature-dependent electricity for an entity's own usage requirements. In the absence of the own-use amendments, such contracts would not qualify for the own-use exception from IFRS 9 due to the design and operation of electricity markets and the fact that electricity is not easily stored. A33The scope of the amendments is tightly constrained to contracts referencing nature-dependent electricity with specific characteristics, limiting the risk of unintended consequences. In addition, entities with contracts in scope of the own-use amendments will be required to disclose details of the contractual terms and conditions that expose the entity to volume variability and risk of oversupply, information about future cash flows under the contract, and qualitative information about how the entity assesses whether a contract might become onerous. This information is expected to help investors understand the risks inherent in contracts applying the own-use amendments. A34The table at the end of this paper includes a summary of the key changes between the ED and final amendments, and the Secretariat's initial assessment of considerations for endorsement.

Questions for the Board

Do Board members have any comments or questions on the own-use amendments or the net-purchaser assessment?
Do Board members agree with the Secretariat's preliminary assessment of the own-use amendments set out in the table at the end of this paper?

Scope: summary of key changes between the ED and the amendments

Proposals in the ED	Stakeholder feedback, including UKEB FCL	Final amendments
Scope - characteristics of contracts in scope
The ED acknowledges that contracts for renewable electricity can be "structured in many ways." The ED lists the characteristics of renewable electricity contracts in scope of the proposed amendments:	Paragraph A2 of the UKEB FCL observed that 6.10.1 of the ED is not entirely clear on whether the amendments would apply to virtual as well as physical PPAs.	The IASB has replaced the term 'contracts for renewable electricity' with 'contracts referencing nature-dependent electricity' and the final amendments clearly state that both virtual and physical PPAs are in scope.
a) The electricity is generated from a nature-dependent source (e.g., wind, sun and water), resulting in variability in the timing and volume of supply.	Paragraph A3 of the UKEB FCL recommended that the IASB consider defining the term 'contract for renewable electricity'. Other respondents to the ED had also asked for further explanation of the terms 'renewable electricity' and 'nature-dependent'. ²⁵	The amendments explain that a contract referencing nature-dependent electricity exposes an entity to variability in the underlying amount of electricity because the source of electricity generation depends on uncontrollable natural conditions (e.g., the weather).
b) 'Pay-as-produced' contractual terms expose the purchaser to "substantially all the volume risk under the contract". Volume risk is "the risk that the volume of electricity produced does not align with the purchaser's demand for electricity at the time of production." (Paragraph 6.10.1)	Paragraph 7 of the UKEB FCL stated that relying on labels such as 'pay-as-produced' may result in some common renewable electricity contracts being treated as derivatives, while other contracts with higher potential volume risk are accounted for as contracts for own-use. Respondents to the ED also observed that "the contractual features of NDE contracts are not uniform or standardised and that new features are being included as the market continues to develop." ²⁶	The IASB has removed the reference to 'pay-as-produced' and generally avoided the use of labels in the final amendments. (Paragraph 2.3A)
Scope - limiting the scope of the amendments
The proposed amendments "provide exceptions to only the requirements in IFRS 9 specified in paragraphs 6.10.3-6.10.6" of the ED, relating to the own-use and hedge accounting proposals. All other applicable requirements in IFRS 9 continue to apply to contracts for renewable electricity in scope of the proposed amendments.	Paragraph A6 of the UKEB FCL expressed a concern that the reference to 'exceptions' in 6.10.2 of the ED could be taken to mean a wholesale exception to paragraph 2.4 or Section 6.3 of IFRS 9 for contracts in scope of the amendments. The IASB acknowledged the concern and clarified that the amendments are more akin to "additional or supplementary requirements that apply to specified situations" ²⁷ than exceptions.	The paragraph referring to exceptions has been removed. The final amendments state that entities are not permitted to apply the final amendments “by analogy to other contracts, items or transactions." (Paragraph 2.3B)
Entities are not permitted to apply the proposed amendments "by analogy to other contracts, items or transactions." (Paragraph 6.10.2)

Scope: preliminary assessment of potential considerations for endorsement

PPAs are often contractually complex and can vary significantly by jurisdiction and according to the structure and operation of the relevant energy market. The challenge for the IASB in developing the amendments has been to ensure that they are clearly and consistently understandable by all entities applying them (see paragraphs A6 and A7 above).

Previous UKEB discussions have highlighted the risk of unintended consequences if the scope was too wide. Feedback from advisory groups and other stakeholders during the influencing phase also identified concerns about the wording of the draft scope. As set out above, the IASB has addressed the main concerns highlighted in the FCL.

However, it remains the case that determining whether or not a contract is in scope of the amendments may require an exercise of judgement.

Mitigating factors

The amendments are very narrowly scoped. The amendments may only be applied to contracts referencing nature-dependent electricity with specific characteristics. Entities are not permitted to apply the amendments by analogy to other contracts, items or transactions.

No significant concerns have been drawn to our attention in relation to the scope of the amendments.

Secretariat preliminary assessment: this is unlikely to be a significant consideration for endorsement purposes.

Own-use: summary of key changes between the ED and the amendments

Proposals in the ED	Stakeholder feedback, including UKEB FCL	Final amendments
Own-use - application of paragraph 2.4 to contracts referencing nature-dependent electricity
In applying paragraph 2.4 to contracts in scope of the proposed amendments, an entity should consider various factors (see below). This should be done “at inception of the contract and at each subsequent reporting date.” (Paragraph 6.10.3)	Paragraph 7 of the FCL sets out the UKEB's key concern in relation to the own-use amendments, which is that the introduction of “an exception to an existing exception within IFRS 9” is an unwarranted departure from principle-based accounting. The IASB disagreed with this assessment and instead viewed the own-use amendments "as an extension of the own-use requirements that applies in particular circumstances." ²⁸	The IASB have clarified that the own-use amendments constitute application guidance to support entities in applying Paragraph 2.4 of IFRS 9 for specific circumstances. Therefore, these requirements have been moved from Section 6 of IFRS 9 ("Hedge Accounting”) to Appendix B of IFRS 9 ("Application guidance"). The application guidance relating to the own-use assessment has been substantially reworded from the proposals in the ED (see below). (Paragraph 2.8)
Own-use - sales of unused electricity
In applying paragraph 2.4 to contracts in scope of the proposed amendments, an entity should consider the reasons for sales of unused renewable electricity.	Paragraphs A10 and A11 of the UKEB FCL noted that volumes delivered under some contracts are significantly affected by seasonal variations, for example, the generation of power from solar panels. Such contracts would not meet the requirement to purchase an equivalent volume of electricity within a month. Most respondents to the ED raised similar concerns about seasonality, and some respondents suggested that a maximum of 12 months might be more reasonable ²⁹.	The IASB has incorporated the changes suggested in the UKEB FCL into B2.8 of the final amendments. The final amendments set out that the volume risk under a contract may result in the entity having "no practical ability to avoid making sales of unused electricity because [of] the design and operation of the electricity market.” Such sales are in accordance with the own use requirements at paragraph 2.4 of IFRS 9 if the entity is a net purchaser of electricity for the duration of the contract. The 'equivalent volume' test has been replaced with a 'net purchaser' test. An entity is a net purchaser of electricity "if it buys sufficient electricity to offset the sales of any unused electricity in the same market in which it sold the electricity.” Although the own-use assessment is performed at the entity level, it is the design and operation of the market in which the entity holds the contract for receipt that results in subsequent sales (see above). Therefore, the IASB has limited the net-purchaser assessment to the same market. (Paragraph B2.7)
A sale is in accordance with the entity's expected purchase or usage requirements if it arises as a result of the entity's exposure to volume risk and the entity has no "practical ability to determine the timing or price of the sale” due to the design and operation of the electricity market. In addition, the entity must have an expectation of purchasing "at least an equivalent volume of electricity within a reasonable time (for example, one month) after the sale". (Paragraph 6.10.3(b))
Own-use – volume of electricity to be delivered
In applying paragraph 2.4 to contracts in scope of the proposed amendments, an entity should consider "the purpose, design and structure of the contract including the volumes of electricity expected to be delivered over the remaining duration of the contract." ³⁰	The requirement to consider "the purpose, design and structure of the contract" had been included by the IASB as a safeguard against 'oversized ³¹ contracts. However, feedback to the ED did not support this element ³² and the IASB decided to replace it with the net purchaser condition.	Wording relating to “the purpose, design and structure of the contract" removed. The clarification on detailed estimates has been removed.
In making the own-use assessment, an entity may rely on "reasonable and supportable information available at the reporting date...for a period not shorter than 12 months after the reporting date (or the entity's normal operating cycle...)." The ED notes that there is no requirement to make detailed estimates for periods far in the future. (Paragraph 6.10.3(a))	Paragraph 6.10.3(a) states that an entity "is not required to make a detailed estimate for periods that are far in the future” when considering if a contract is held for an entity's expected purchase or usage requirements. Paragraph A8 of the UKEB FCL highlights the risk that this may be interpreted as a concession to the long-standing own-use requirements of paragraph 2.4 of IFRS 9.	In assessing whether it is, and will continue to be, a net purchaser, an entity considers "reasonable and supportable information ³³ (that is available without undue cost or effort) about its past, current and expected future electricity transactions over a reasonable amount of time” which, in relation to the assessment of past purchases shall not exceed 12 months. (Paragraph B2.8)

Own-use: preliminary assessment of potential considerations for endorsement

It is expected that certain physical PPAs for receipt of electricity which were previously recognised as derivatives on the balance sheet at fair value will now be accounted for as executory contracts.

The UKEB's FCL expressed concerns about a departure from principle-based accounting and noted that consultation with UK stakeholders had not revealed any clear technical arguments in favour of applying own-use treatment to the defined contracts (see paragraph A31 above). Concerns have also been raised that widening the existing own-use requirements could risk unintended consequences or create an expectation of wider relaxations.

Mitigating factors

The IASB received feedback from investors that fair value accounting for physical PPAs “does not provide useful information about the performance of the entity” ³⁴ which is consistent with what UK stakeholders have told us (paragraph A22 above). This is in part due to the practical and operational challenges in valuing these highly complex and long-term contracts.

The own-use amendments have been presented by the IASB as application guidance and are intended to be applied to contracts which are entered into by an entity to meet its own usage requirements only. The net purchaser assessment restricts the application to contracts where these amounts of electricity are being used by the entity. Therefore, information about the fluctuation in fair value of such contracts may not provide useful information for users.

The amendments are very narrowly scoped, aimed at reducing the risk of unintended consequences. In addition, entities with contracts in scope of the own-use amendments will be required to provide additional disclosure (see paragraph A33 above) to help investors understand the long-term cash flows and risks inherent in contracts applying the own-use amendments.

Since the amendments were issued, no significant concerns have been drawn to our attention in relation to the own-use amendments.

Secretariat preliminary assessment: this is unlikely to be a significant consideration for endorsement purposes.

Appendix B: Contracts Referencing Nature-dependent Electricity – (i) hedge accounting, (ii) disclosures and (iii) transition

(i) Hedge accounting

B1The hedge accounting amendments are applicable to contracts referencing nature-dependent electricity which do not meet the own-use exception in IFRS 9. A summary of the key changes between the Exposure Draft Contracts for Renewable Electricity (ED) and the final amendments is included in the table at the end of this paper. B2These contracts, which expose an entity to variability in the contracted volume of electricity ³⁵, are often entered into to fix the price of electricity over the contract term and thereby ‘hedge' the entity's exposure to price risk. They are accounted for as derivatives in the accounts since the value of the contract changes in response to the market price of electricity, with such changes recognised in profit or loss.

Cash flow hedge accounting

B3Cash flow hedging is employed to mitigate exposure to variability in future cash flows associated with, for example, a forecast transaction. B4Cash flow hedge accounting permits an entity to "defer the gain or loss on the hedging instrument to a period or periods in which the hedged expected future cash flows affect profit or loss” (IFRS 9 paragraph B6.5.2). B5Therefore, gains and losses on the hedging instrument which are an 'effective' hedge ³⁶ are initially recognised in a cash flow hedge reserve and presented in other comprehensive income. These gains and losses are reclassified to profit or loss in the same period that the hedged item (e.g., a forecast transaction) is recognised in profit or loss. This reduces volatility in the income statement and enables a better representation of the “purpose and effect” of hedging instruments and of an entity's risk management activities ³⁷ in the accounts. B6Hedge accounting represents a departure from the normal accounting requirements for recognising gains and losses. Therefore, IFRS 9 permits hedge accounting only if a hedging relationship meets certain qualifying criteria. B7One of the qualifying criteria for a cash flow hedge of a forecast transaction is that the transaction must be 'highly probable' (IFRS 9 paragraph 6.3.3). The hedged item must also be designated with sufficient specificity at the inception of the hedge (IFRS 9 paragraph 6.3.7), meaning that an entity "can only designate a specified nominal amount of forecast electricity transactions if they will occur with enough certainty and consistency throughout the duration of the hedging relationship." ³⁸ B8This posed a challenge for entities with contracts referencing nature-dependent electricity, which were exposed to variability in the contracted volume of electricity: 1. Sellers of nature-dependent electricity encountered difficulties in designating a fixed nominal amount of forecast electricity sales as the hedged item for the duration of the contract. The volume of electricity sales deemed to be highly probable (see paragraph B7) is likely to be much lower than the total amount of electricity expected to be produced and sold by the generation facility ³⁹ for which the contract may provide a highly effective hedge of the entity's price risk. In addition, although the forecast transaction (which is the hedged item) must be highly probable, no such condition applies to the cash flows to be considered in valuing the hedging instrument. This difference in volume assumptions may result in hedge ineffectiveness. ⁴⁰ 2. Purchasers of electricity can reliably estimate forecast electricity demand (e.g., by reference to past usage) and typically contract to purchase a proportion of total demand. Therefore, purchasers may not experience the same challenges as sellers in designating a fixed nominal amount of forecast electricity transactions as the hedged item. Nevertheless, hedge ineffectiveness may arise due to the variability in the amount of electricity expected to be delivered under the contract which is the hedging instrument ⁴¹. B9Although an entity may have entered into a contract referencing nature-dependent electricity to hedge its exposure to changes in the market price of electricity (paragraph B2), the volume variability inherent in the contract prevents the application of hedge accounting without these amendments.

Amendments to cash flow hedge accounting requirements

B10The amendments allow an entity to apply cash flow hedge accounting to hedging relationships in which the hedged item is a variable amount of forecast electricity transactions and the hedging instrument is a contract referencing nature-dependent electricity. B11The variable amount designated as the hedged item is aligned to the variable amount of electricity expected to be delivered by a particular facility referenced in the contract which is the hedging instrument ⁴². Therefore, the same volume assumptions are used to measure both the hedging instrument and the hypothetical derivative ⁴³ for the purposes of measuring hedge effectiveness (see paragraph B8). B12Some respondents to the hedge accounting proposals in the ED queried if using the same volume assumptions would result in “the hedged item simply mirroring the hedging instrument” ⁴⁴. However, the International Accounting Standards Board (IASB) considered that the cash flows of the hedged item and the hedging instrument could be impacted by other factors besides the volume of electricity transactions ⁴⁵.

Hedge accounting Illustrative Example

B13The IASB has included a qualitative Illustrative Example in the amendments to explain the application of the new requirements. The example sets out how a purchaser under a contract referencing nature-dependent electricity may apply the hedge accounting amendments. B14In its Final Comment Letter (FCL), the UKEB outlined aspects of the ED proposals which had been flagged by UK stakeholders as requiring clarification. The extent to which these issues have been addressed by the qualitative example included in the final amendments is set out in the table below.

Hedge accounting issue	Addressed in Illustrative Example?
How to designate the hedged item (or component of an item) with sufficient specificity e.g. the appropriate confidence level to be used in forecasting the variable volume (paragraph A14 of FCL).	The IASB considers that designating "a variable nominal amount of electricity as the hedged item is not the same as designating an absolute amount that varies from one period to the next.” ⁴⁶ Paragraph IE152 of the Illustrative Example outlines that Entity A designates as the hedged item “a variable nominal amount of electricity purchases per month that is aligned to the variable nominal amount of electricity that Wind Farm X is expected to deliver to the market as referenced in the hedging instrument. Entity A allocates the first purchases made each month to the variable nominal amount designated.”
How to determine the volume of future electricity transactions that are highly probable for periods far into the future (paragraph A14 and A15 of FCL).	The IASB has taken the view that "entities that currently purchase and use electricity will continue to do so in the future. Therefore, in the absence of evidence to the contrary an entity would expect its electricity purchases based on its past and current purchase practice to continue for the hedged term" ⁴⁷ (see paragraph IE152 of the Illustrative Example). The IASB has also clarified that if cash flows under the contract (i.e. the hedging instrument) arise only on occurrence of a hedged sale or purchase, such forecast transactions are deemed to be highly probable by nature ⁴⁸.
How to build the hypothetical derivative.	Paragraph IE158 of the Illustrative Example states that “Entity A uses the same volume assumptions it uses to measure the contract referencing nature-dependent electricity to construct a hypothetical derivative to measure the changes in present value of the hedged item." However, price assumptions must be based on the market in which Entity A purchases electricity.
How to account for hedge ineffectiveness arising from e.g., differences in timing of the supply of electricity underlying the hedging instrument and hedged purchases of electricity (paragraph A16 of FCL).	Aligning the volume assumptions underlying the measurement of the hedged item and the hedging instrument ensures that hedge ineffectiveness caused by volume uncertainty does not arise. Other sources of hedge ineffectiveness may arise, but this does not automatically preclude the possibility of an economic relationship between the hedged item and the hedging instrument. IFRS 9 does not require that a hedging relationship be perfectly effective ⁴⁹. Paragraph IE155 of the Illustrative Example highlights two possible sources of hedge ineffectiveness, being the difference in electricity prices between Region One and Region Two and structural price differences caused by differences in the timing of demand and supply of electricity. Paragraphs IE158 and IE159 outline one possible method for measuring the hedged item and the hedging instrument.
Need for clarity on the reclassification adjustment (paragraph A17 of FCL).	Paragraph IE159 of the illustrative example states that Entity A adjusts the cash flow hedge reserve in accordance with paragraph 6.5.11(a) of IFRS 9.

Secretariat analysis

B15In common with most other respondents to the ED ⁵⁰, the UKEB welcomed the hedge accounting proposals. The proposals were expected to result in a more accurate reflection in the accounts of the economic substance of some arrangements involving contracts referencing nature-dependent electricity (paragraph A12 of FCL). However, the UKEB observed that the complexity of the proposals meant there was a need for “detailed application guidance and illustrative examples to show preparers and users how the proposals are intended to apply" (paragraph A12 of FCL). B16The IASB has included one Illustrative Example in the final amendments, to support consistent application ⁵¹. This example is qualitative and illustrates one possible way in which a purchaser under a contract referencing nature-dependent electricity might apply the hedge accounting amendments. The example explains the application of key principles without going into the detailed mechanics of e.g., nature-dependent electricity contracts, electricity markets and hedge-accounting. B17During the ED consultation, some UK stakeholders told the UKEB that any example specific to the hedge accounting amendments could have wider repercussions and risked impacting on existing guidance within IFRS 9 and the application of general hedge accounting principles. However, initial outreach with UK stakeholders in the endorsement phase of this project suggests that the Illustrative Example will support the application of the amendments. In addition, the hedge accounting amendments are unlikely to disturb existing IFRS 9 requirements because they are narrowly scoped, they clearly state that the other hedge accounting requirements of IFRS 9 continue to apply ⁵², and they are not permitted to be applied “by analogy to other contracts, items or transactions.” ⁵³ B18The Illustrative Example is relatively high level and does not cover every scenario and eventuality (see paragraph B16 above). It is likely that the application of the hedge accounting amendments will require the exercise of judgement. In addition, although the scope of the amendments has been tightly constrained, it remains to be seen whether entities apply the guidance applicable to the amendments more generally to their hedging relationships ⁵⁴. While the Illustrative Example is expected to improve consistency in how the amendments are applied, it is likely that there will be demand for accounting firms to develop additional guidance. Given the complexity of the subject matter, however, it is our understanding that this process is likely to take a number of months. B19While it is difficult to estimate the population that will be impacted by the hedge accounting amendments at this early stage, we expect that large corporates are most likely to be affected. Such entities have access to dedicated finance teams and technical support and so would generally be expected to be able to deal with the technical complexity of the amendments.

Dissenting opinions

B20One member of the IASB dissented from approving the amendments for issue. Mr Mackenzie disagreed with the hedge accounting proposals, as he could see no principle-based reason for introducing a new variant of cash flow hedging for contracts within the narrow scope of the amendments and not more widely. Paragraph 13 of the UKEB FCL recommended that the IASB consider whether there is merit to extending these changes to other cash flow hedging relationships, as part of its post implementation review of IFRS 9 Hedge Accounting. B21The table at the end of this paper includes a summary of the key changes between the ED and final amendments, and the Secretariat's initial assessment of considerations for endorsement.

Questions for the Board

Do Board members have any comments or questions regarding the hedge accounting amendments?
Do Board members agree with the Secretariat's preliminary assessment of the hedge accounting amendments set out in the table at the end of this paper?

(ii) Disclosures

B22Entities will be required to disclose information about their contracts referencing nature-dependent electricity ⁵⁵. A summary of the key changes between the ED and the final amendments is included in the table at the end of this paper. B23Where the own-use amendments are applied to a contract for the purchase of electricity, an entity must disclose the terms and conditions which expose it to volume variability and risk of oversupply, as well as information to demonstrate that it meets the net purchaser condition ⁵⁶ to apply own-use. To compensate investors for the loss of fair value information, an entity must provide information about future cash flows under the contract and how it monitors whether the contract has become onerous. B24When preparing the disclosures required by paragraph 23A of IFRS 7 ⁵⁷, entities applying the hedge accounting amendments must disaggregate information for contracts referencing nature-dependent electricity and disclose this separately.

Secretariat analysis

B25The UKEB Secretariat's view is that the disclosure amendments are much improved from the proposals in the ED. B26The proposals in the ED included wide ranging requirements to disclose information about all the contracts for renewable electricity an entity is party to (paragraph 42T of the ED). The final amendments, however, take a more proportionate approach. B27Required disclosures are generally limited to information about contracts for the purchase of nature-dependent electricity which have been accounted for in accordance with the own-use amendments and contracts accounted for at fair value applying the hedge accounting amendments. The only disclosure requirement in relation to nature-dependent electricity contracts that meet the own-use conditions without the need to apply B2.7 and B2.8 relates to a cross-referencing requirement where information is provided about these contracts in another note (paragraph 30C of IFRS 7). The final amendments address many of the concerns highlighted in paragraphs 15 to 17 of the FCL and take into account that the disclosure requirements of other IFRS standards are sufficient for certain contracts referencing nature-dependent electricity in scope of the amendments. B28The UKEB Secretariat consider that in general it should be relatively clear whether an entity falls within the scope of the disclosure requirements in paragraph 30A of IFRS 7. If an entity which is party to a contract referencing nature-dependent electricity is required to apply the guidance in B2.7 and B2.8 to achieve own-use accounting for the contract, they will be required to provide the disclosures set out in the amendments. However, if an entity is clearly within the own-use requirements of paragraph 2.4 of IFRS 9 without any need to consider B2.7 and B2.8 (e.g., because they do not sell any of the electricity that is delivered under the contract), it is our understanding that the entity would not be required to provide the additional disclosures in 30A of IFRS 7. B29It appears likely that entities will need to exercise judgement in some instances to conclude whether the additional disclosures are required or not (i.e., whether they need the amendments to achieve own-use accounting). However, own-use accounting for such contracts is already an area where the exercise of judgement is required. We believe that overall, these disclosure requirements should provide better information for users about contracts that are within scope of the amendments. B30In developing the amendments, one of the IASB's objectives was to require disclosures which would allow users to understand how an entity's contracts referencing nature-dependent electricity impact its financial performance. This is covered by paragraph 30A(c) of IFRS 7, which requires an entity to make this disclosure based on the information used in the net purchaser assessment for the reporting period. B31This requirement is in line with the UKEB's recommendation for the IASB to require disclosure relating to judgements that result in contracts qualifying for the own-use exception (see paragraph A21 of the FCL). Our initial outreach with UK stakeholders in the endorsement phase of this project suggests that making the disclosure required by paragraph 30A(c) of IFRS 7 would not cause undue difficulties although there is some concern that the data collection is more complex than assumed by the IASB. For example, it may be difficult to estimate the price to be used in calculating the costs of electricity purchases to offset any sales arising under the contracts ⁵⁸, where these are a subset of a much larger volume of electricity purchases (i.e. which specific units are the offsetting ones).

(iii) Effective date and transition

B32The amendments have an effective date of 1 January 2026. Early application is permitted. A summary of the key changes between the ED and the final amendments is included in the table at the end of this paper. B33The own-use amendments must be applied based on the facts and circumstances in existence at the date of initial application. The amendments require retrospective application, without the need to restate comparative information. B34The hedge accounting amendments must be applied prospectively. B35The table at the end of this paper includes a summary of the key changes between the ED and final amendments, and the Secretariat's initial assessment of considerations for endorsement.

Questions for the Board

Do Board members have any comments or questions regarding the disclosure elements of the amendments?
Do Board members agree with the Secretariat's preliminary assessment of the disclosure amendments set out in the table at the end of this paper?
Do Board members wish to highlight any aspects of the amendments where further technical work or clarification should be considered by the Secretariat in drafting the Draft Endorsement Criteria Assessment for the February 2025 UKEB meeting?

Disclosures: summary of key changes between the ED and final amendments

| Proposals in the ED | Stakeholder feedback, including UKEB FCL | Final amendments The UK Endorsement Board (UKEB) monitors the UK adoption of new IFRS Standards and Amendments to existing Standards. We have been informed of an ongoing need for guidance on the application of IFRS 9 Financial Instruments related to Power Purchase Agreements (PPAs), particularly those for nature-dependent electricity (e.g., wind, solar, hydro).

The IFRS Interpretations Committee (IFRIC) received a submission on the application of paragraph 2.4 of IFRS 9 (the 'own-use' exception) to certain physical PPAs, leading to a recommendation for the IASB to develop a narrow-scope amendment. The IASB acknowledged similar issues with virtual PPAs and suggested that hedge accounting could be a solution.

Consequently, the IASB initiated a project to amend IFRS 9 and IFRS 7 to permit certain PPAs to meet own-use and hedge accounting requirements, and to mandate relevant disclosures. This paper provides an overview of these amendments and significant changes from the Exposure Draft (ED) Contracts for Renewable Energy.

Key Amendments

The amendments introduce key changes to IFRS 9 and IFRS 7:

Scope: The amendments apply only to contracts referencing nature-dependent electricity.
Own-use exception: The 'own-use' exception in IFRS 9 is extended to include contracts for purchasing nature-dependent electricity under certain conditions.
Hedge accounting: Entities can now apply cash flow hedge accounting to relationships where the hedged item is a variable amount of forecast electricity transactions, and the hedging instrument is a contract referencing nature-dependent electricity.
Disclosure: Entities are required to disclose information about their contracts referencing nature-dependent electricity.

Key Aspects and Considerations:

Scope and Own-Use

Clarity of 'nature-dependent electricity': Stakeholders have sought clarification on the definition of 'nature-dependent' electricity and how to assess the variability risk. The IASB has provided clarification that contracts with certain risk mitigation features (e.g., caps and floors) may still be in scope.
Judgement: Entities will need to exercise judgement to determine if their contracts are in scope and if they meet the own-use exception, considering contractual rights and obligations.
Net purchaser assessment: The amendments clarify that sales of electricity during the contract period are consistent with own-use if the entity is, and expects to be, a net purchaser of electricity for the contract period. This assessment should use reasonable and supportable information, typically over a short period, not exceeding 12 months for past purchases.
One-way application: The 'one-way' application of own-use rules remains, meaning contracts that fail the own-use test revert to fair value accounting for their remaining duration, without being able to move back to own-use.

Hedge Accounting

Volume variability: The amendments address the challenge of volume variability in nature-dependent electricity contracts, which previously hindered the application of hedge accounting.
Illustrative Example: The IASB has provided a qualitative Illustrative Example to support the application of the new hedge accounting requirements.
Complexities: While the amendments are welcomed for better reflecting economic substance, their technical complexity may require significant judgement and additional guidance from accounting firms.

Disclosures

Reduced Scope: The final amendments adopt a more proportionate approach to disclosures compared to the ED, focusing on contracts accounted for under own-use amendments or fair value applying hedge accounting.
Information for investors: Entities must disclose contractual terms exposing them to volume variability and oversupply risk, information about future cash flows, and how onerous contracts are monitored.
Disaggregation: Information for contracts applying hedge accounting amendments must be disaggregated and disclosed separately.

Effective Date and Transition

Effective Date: 1 January 2026, with early application permitted.
Retrospective Application (Own-use): Own-use amendments apply retrospectively based on facts and circumstances at the date of initial application, without restating comparative information.
Prospective Application (Hedge Accounting): Hedge accounting amendments apply prospectively.

Overall Assessment

The UKEB Secretariat generally welcomes the amendments, noting that the IASB has addressed many stakeholder concerns. The narrow scope of the amendments is expected to reduce the risk of unintended consequences. While technical complexities exist, these are likely manageable for large corporates. The preliminary assessment is that these amendments are unlikely to be a significant consideration for endorsement purposes.

Footnotes

Hedge accounting: summary of key changes between the ED and final amendments

| Proposals in the ED | Stakeholder feedback, including UKEB FCL ### Data: Financial Performance {: #section-3 }

Revenue Analysis

Detailed revenue breakdown...

Regional Performance

Performance by region...

Cost Management

Our approach to costs...

Operating Expenses

Details of operating costs...

Risk Management

Assessment Process

How we assess risks...

Effective date and transition: preliminary assessment of potential considerations for endorsement

Since the amendments were issued, no significant concerns have been drawn to our attention in relation to the effective date and transition requirements of the amendments.

Secretariat preliminary assessment: this is unlikely to be a significant consideration for endorsement purposes.

Disclosures: summary of key changes between the ED and final amendments

| Proposals in the ED | Stakeholder feedback, including UKEB FCL ** **

Revenue Analysis

Detailed revenue breakdown...

Regional Performance

Performance by region...

Cost Management

Our approach to costs...

Operating Expenses

Details of operating costs...

Effective date and transition: preliminary assessment of potential considerations for endorsement

Since the amendments were issued, no significant concerns have been drawn to our attention in relation to the effective date and transition requirements of the amendments.

Secretariat preliminary assessment: this is unlikely to be a significant consideration for endorsement purposes.

Disclosures: summary of key changes between the ED and final amendments

| Proposals in the ED | Stakeholder feedback, including UKEB FCL | If | 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| The IASB has replaced the term 'contracts for renewable electricity' with 'contracts referencing nature-dependent electricity' and the final amendments clearly state that both virtual and physical PPAs are in scope. | | The The IASB has replaced the term 'contracts for renewable electricity' with 'contracts referencing nature-dependent electricity' and the final amendments clearly state that both virtual and physical PPAs are in scope. The amendments explain that a contract referencing nature-dependent electricity exposes an entity to variability in the underlying amount of electricity because the source of electricity generation depends on uncontrollable natural conditions (e.g., the weather). The IASB has removed the reference to 'pay-as- produced' and generally avoided the use of labels in the final amendments. (Paragraph 2.3A) The paragraph referring to exceptions has been removed. The final amendments state that entities are not permitted to apply the final amendments “by analogy to other contracts, items or transactions." (Paragraph 2.3B) |

Hedge accounting

Cash flow hedge accounting

Amendments to cash flow hedge accounting requirements

Hedge accounting Illustrative Example

Hedge accounting issue	Addressed in Illustrative Example?
How to designate the hedged item (or component of an item) with sufficient specificity e.g. the appropriate confidence level to be used in forecasting the variable volume (paragraph A14 of FCL).	The IASB considers that designating "a variable nominal amount of electricity as the hedged item is not the same as designating an absolute amount that varies from one period to the next.” ⁴⁶ Paragraph IE152 of the Illustrative Example outlines that Entity A designates as the hedged item “a variable nominal amount of electricity purchases per month that is aligned to the variable nominal amount of electricity that Wind Farm X is expected to deliver to the market as referenced in the hedging instrument. Entity A allocates the first purchases made each month to the variable nominal amount designated.”
How to determine the volume of future electricity transactions that are highly probable for periods far into the future (paragraph A14 and A15 of FCL).	The IASB has taken the view that "entities that currently purchase and use electricity will continue to do so in the future. Therefore, in the absence of evidence to the contrary an entity would expect its electricity purchases based on its past and current purchase practice to continue for the hedged term" ⁴⁷ (see paragraph IE152 of the Illustrative Example). The IASB has also clarified that if cash flows under the contract (i.e. the hedging instrument) arise only on occurrence of a hedged sale or purchase, such forecast transactions are deemed to be highly probable by nature ⁴⁸.
How to build the hypothetical derivative.	Paragraph IE158 of the Illustrative Example states that “Entity A uses the same volume assumptions it uses to measure the contract referencing nature-dependent electricity to construct a hypothetical derivative to measure the changes in present value of the hedged item." However, price assumptions must be based on the market in which Entity A purchases electricity.
How to account for hedge ineffectiveness arising from e.g., differences in timing of the supply of electricity underlying the hedging instrument and hedged purchases of electricity (paragraph A16 of FCL).	Aligning the volume assumptions underlying the measurement of the hedged item and the hedging instrument ensures that hedge ineffectiveness caused by volume uncertainty does not arise. Other sources of hedge ineffectiveness may arise, but this does not automatically preclude the possibility of an economic relationship between the hedged item and the hedging instrument. IFRS 9 does not require that a hedging relationship be perfectly effective ⁴⁹. Paragraph IE155 of the Illustrative Example highlights two possible sources of hedge ineffectiveness, being the difference in electricity prices between Region One and Region Two and structural price differences caused by differences in the timing of demand and supply of electricity. Paragraphs IE158 and IE159 outline one possible method for measuring the hedged item and the hedging instrument.
Need for clarity on the reclassification adjustment (paragraph A17 of FCL).	Paragraph IE159 of the illustrative example states that Entity A adjusts the cash flow hedge reserve in accordance with paragraph 6.5.11(a) of IFRS 9.

Secretariat analysis

Dissenting opinions

Questions for the Board

Do Board members have any comments or questions regarding the hedge accounting amendments?
Do Board members agree with the Secretariat's preliminary assessment of the hedge accounting amendments set out in the table at the end of this paper?

(ii) Disclosures

Secretariat analysis

(iii) Effective date and transition

Questions for the Board

Do Board members have any comments or questions regarding the disclosure elements of the amendments?
Do Board members agree with the Secretariat's preliminary assessment of the disclosure amendments set out in the table at the end of this paper?
Do Board members wish to highlight any aspects of the amendments where further technical work or clarification should be considered by the Secretariat in drafting the Draft Endorsement Criteria Assessment for the February 2025 UKEB meeting?

Disclosures: summary of key changes between the ED and final amendments

| Proposals in the ED | Stakeholder feedback, including UKEB FCL | The IASB has provided guidance that the IASB considers that designating "a variable nominal amount of electricity as the hedged item is not the same as designating an absolute amount that varies from one period to the next.” ⁴⁶ Paragraph IE152 of the Illustrative Example outlines that Entity A designates as the hedged item “a variable nominal amount of electricity purchases per month that is aligned to the variable nominal amount of electricity that Wind Farm X is expected to deliver to the market as referenced in the hedging instrument. Entity A allocates the first purchases made each month to the variable nominal amount designated.” The IASB has taken the view that "entities that currently purchase and use electricity will continue to do so in the future. Therefore, in the absence of evidence to the contrary an entity would expect its electricity purchases based on its past and current purchase practice to continue for the hedged term" ⁴⁷ (see paragraph IE152 of the Illustrative Example). The IASB has also clarified that if cash flows under the contract (i.e. the hedging instrument) arise only on occurrence of a hedged sale or purchase, such forecast transactions are deemed to be highly probable by nature ⁴⁸. Paragraph IE158 of the Illustrative Example states that “Entity A uses the same volume assumptions it uses to measure the contract referencing nature- dependent electricity to construct a hypothetical derivative to measure the changes in present value of the hedged item." However, price assumptions must be based on the market in which Entity A purchases electricity. Aligning the volume assumptions underlying the measurement of the hedged item and the hedging instrument ensures that hedge ineffectiveness caused by volume uncertainty does not arise. Other sources of hedge ineffectiveness may arise, but this does not automatically preclude the possibility of an economic relationship between the hedged item and the hedging instrument. IFRS 9 does not require that a hedging relationship be perfectly effective ⁴⁹. Paragraph IE155 of the Illustrative Example highlights two possible sources of hedge ineffectiveness, being the difference in electricity prices between Region One and Region Two and structural price differences caused by differences in the timing of demand and supply of electricity. Paragraphs IE158 and IE159 outline one possible method for measuring the hedged item and the hedging instrument. Paragraph IE159 of the illustrative example states that Entity A adjusts the cash flow hedge reserve in accordance with paragraph 6.5.11(a) of IFRS 9. | The following are the key changes related to hedge accounting between the ED and the final amendments. | The IASB has provided a guidance that the IASB considers that designating "a variable nominal amount of electricity as the hedged item is not the same as designating an absolute amount that varies from one period to the next." ⁴⁶ Paragraph IE152 of the Illustrative Example outlines that Entity A designates as the hedged item “a variable nominal amount of electricity purchases per month that is aligned to the variable nominal amount of electricity that Wind Farm X is expected to deliver to the market as referenced in the hedging instrument. Entity A allocates the first purchases made each month to the variable nominal amount designated.” The IASB has taken the view that "entities that currently purchase and use electricity will continue to do so in the future. Therefore, in the absence of evidence to the contrary an entity would expect its electricity purchases based on its past and current purchase practice to continue for the hedged term" ⁴⁷ (see paragraph IE152 of the Illustrative Example). The IASB has also clarified that if cash flows under the contract (i.e. the hedging instrument) arise only on occurrence of a hedged sale or purchase, such forecast transactions are deemed to be highly probable by nature ⁴⁸. Paragraph IE158 of the Illustrative Example states that “Entity A uses the same volume assumptions it uses to measure the contract referencing nature- dependent electricity to construct a hypothetical derivative to measure the changes in present value of the hedged item." However, price assumptions must be based on the market in which Entity A purchases electricity. Aligning the volume assumptions underlying the measurement of the hedged item and the hedging instrument ensures that hedge ineffectiveness caused by volume uncertainty does not arise. Other sources of hedge ineffectiveness may arise, but this does not automatically preclude the possibility of an economic relationship between the hedged item and the hedging instrument. IFRS 9 does not require that a hedging relationship be perfectly effective ⁴⁹. Paragraph IE155 of the Illustrative Example highlights two possible sources of hedge ineffectiveness, being the difference in electricity prices between Region One and Region Two and structural price differences caused by differences in the timing of demand and supply of electricity. Paragraphs IE158 and IE159 outline one possible method for measuring the hedged item and the hedging instrument. Paragraph IE159 of the illustrative example states that Entity A adjusts the cash flow hedge reserve in accordance with paragraph 6.5.11(a) of IFRS 9. | | The: The IASB has provided guidance that the IASB considers that designating "a variable nominal amount of electricity as the hedged item is not the same as designating an absolute amount that varies from one period to the next.” ⁴⁶ Paragraph IE152 of the Illustrative Example outlines that Entity A designates as the hedged item “a variable nominal amount of electricity purchases per month that is aligned to the variable nominal amount of electricity that Wind Farm X is expected to deliver to the market as referenced in the hedging instrument. Entity A allocates the first purchases made each month to the variable nominal amount designated.” The IASB has taken the view that "entities that currently purchase and use electricity will continue to do so in the future. Therefore, in the absence of evidence to the contrary an entity would expect its electricity purchases based on its past and current purchase practice to continue for the hedged term" ⁴⁷ (see paragraph IE152 of the Illustrative Example). The IASB has also clarified that if cash flows under the contract (i.e. the hedging instrument) arise only on occurrence of a hedged sale or purchase, such forecast transactions are deemed to be highly probable by nature ⁴⁸. Paragraph IE158 of the Illustrative Example states that “Entity A uses the same volume assumptions it uses to measure the contract referencing nature- dependent electricity to construct a hypothetical derivative to measure the changes in present value of the hedged item." However, price assumptions must be based on the market in which Entity A purchases electricity. Aligning the volume assumptions underlying the measurement of the hedged item and the hedging instrument ensures that hedge ineffectiveness caused by volume uncertainty does not arise. Other sources of hedge ineffectiveness may arise, but this does not automatically preclude the possibility of an economic relationship between the hedged item and the hedging instrument. IFRS 9 does not require that a hedging relationship be perfectly effective ⁴⁹. Paragraph IE155 of the Illustrative Example highlights two possible sources of hedge ineffectiveness, being the difference in electricity prices between Region One and Region Two and structural price differences caused by differences in the timing of demand and supply of electricity. Paragraphs IE158 and IE159 outline one possible method for measuring the hedged item and the hedging instrument. Paragraph IE159 of the illustrative example states that Entity A adjusts the cash flow hedge reserve in accordance with paragraph 6.5.11(a) of IFRS 9. |

The amendments also include additions to the Illustrative Examples which accompany IFRS 9 Financial Instruments and the Basis for Conclusions of IFRS 9 and IFRS 7 Financial Instruments: Disclosures. As these are not mandatory parts of the IFRS Accounting Standards, and therefore not adopted for use in the UK, they are excluded from the endorsement assessment work. ↩
The 'own use' exception applies to certain contracts that would otherwise be accounted for as financial instruments at fair value, and results in these contracts being accounted for as executory contracts. ↩
Physical power purchase agreements are contracts for the receipt or delivery of electricity. ↩
Virtual PPAs are not contracts for the receipt or delivery of electricity. They typically require net settlement of the difference between the fixed contract price and the market price for the contracted volume of electricity. ↩
July 2023 IASB meeting staff paper 12, paragraphs 53 - 62. ↩
See December 2023 IASB Staff Paper agenda reference 3 and January 2024 IASB General Update Paper 5 Appendix A ↩
Physical power purchase agreements are contracts for the receipt or delivery of electricity. ↩
Virtual PPAs are not contracts for the receipt or delivery of electricity. They typically require net settlement of the difference between the fixed contract price and the market price for the contracted volume of electricity. ↩
September 2024 IASB meeting agenda paper 3A, paragraph 32 ↩
September 2024 IASB meeting agenda paper 3B, paragraph 33 ↩
September 2024 IASB meeting agenda paper 3A, paragraph 17 ↩
Paragraph BC2.18D of the Amendments to the Basis for Conclusions on IFRS 9 ↩
For example, from the perspective of the counterparty to a contract referencing nature-dependent electricity, or any other commodity, where from their perspective the contract is for the sale of electricity or other commodity. ↩
Amendments to the Basis for Conclusions on IFRS 9, paragraph BC2.18B ↩
An entity recognises its rights and obligations under an executory contract only to the extent of either party's performance under the contract (paragraph 4.58 of the Conceptual Framework for Financial Reporting). Applying this to a contract to purchase nature dependent electricity, the purchasing entity would recognise (amongst other things) the cost of the electricity delivered under the contract for the financial reporting period as an expense. ↩
September 2024 IASB meeting agenda paper 3B, paragraph 13 ↩
ED, paragraph B14. At its September 2024 meeting, the IASB referred to a comment letter from an investor organisation to support the view put forward at B14 (see paragraph 14 of staff paper 3B) ↩
The UKEB, the Canadian Accounting Standards Board and the Financial Accounting Standards Board all commented on the need for adequate disclosures at the Accounting Standards Advisory Forum on 27 September 2024. ↩
September 2024 Accounting Standards Advisory Forum meeting and September 2024 IASB meeting ↩
For example, whether the battery capacity is held by the electricity generator, an electricity market intermediary, or the end corporate consumer. ↩
Dissenting opinions to the amendments, paragraph DO9 ↩
Dissenting opinions to the amendments, paragraph DO7 ↩
Paragraph 2.13 of the Conceptual Framework for Financial Reporting states that "[t]o be a perfectly faithful representation, a depiction would...be complete, neutral and free from error." ↩
Paragraph 7 of the UKEB FCL ↩
September 2024 IASB meeting agenda paper 3A, paragraph 32 ↩
September 2024 IASB meeting agenda paper 3A, paragraph 44 ↩
October 2024 IASB meeting agenda paper 3A, paragraph 18 ↩
September 2024 IASB meeting agenda paper 3B, paragraphs 9 - 10 ↩
September 2024 IASB meeting agenda paper 3B, paragraph 72 ↩
BC20(a) of the Basis for Conclusions on the ED explains that "If an entity enters into a contract that is expected to continuously deliver more electricity than the entity needs, such an 'oversized' contract would not be in accordance with the entity's expected usage requirements." ↩
A contract which continuously delivers more electricity that an entity needs. ↩
September 2024 IASB meeting agenda paper 3B, paragraph 56 - 58 ↩
September 2024 IASB meeting agenda paper 3B paragraph 83 states: "...the IASB used the phrase 'reasonable and supportable information' as this is a known and well understood phrase in IFRS 9 with regards to the requirements in paragraphs B5.5.49-B5.5.54 of IFRS 9." ↩
ED, paragraph B14. At its September 2024 meeting, the IASB referred to a comment letter from an investor organisation to support the view put forward at B14 (see paragraph 14 of staff paper 3B) ↩
Paragraph 2.3A of the Amendments states that in scope contracts "expose an entity to variability in the underlying amount of electricity because the source of electricity generation depends on uncontrollable natural conditions (for example, the weather)." ↩
Paragraph B6.4.1 of IFRS 9 states that hedge effectiveness "is the extent to which changes in the fair value or the cash flows of the hedging instrument offset changes in the fair value or the cash flows of the hedged item." ↩↩
IFRS 9, paragraph 6.1.1 ↩↩
Amendments to the Basis for Conclusions on IFRS 9, paragraph BC6.663 ↩↩
March 2024 IASB meeting agenda paper 3B, paragraphs 37 - 41 ↩↩
March 2024 IASB meeting agenda paper 3B, paragraphs 42 - 44 ↩↩
March 2024 IASB meeting agenda paper 3B, paragraphs 60 ↩↩
October 2024 IASB meeting agenda paper 3A and summary ↩↩
IFRS 9 paragraph B6.5.5 states "To calculate the change in the value of the hedged item for the purpose of measuring hedge ineffectiveness, an entity may use a derivative that would have terms that match the critical terms of the hedged item (this is commonly referred to as a 'hypothetical derivative')..." ↩↩
October 2024 IASB meeting agenda paper 3A, paragraph 73 ↩↩
Amendments to the Basis for Conclusions on IFRS 9, paragraph BC6.677 ↩↩
Amendments to the Basis for Conclusions on IFRS 9, paragraph BC6.665 ↩↩↩↩↩
Amendments to the Basis for Conclusions on IFRS 9, paragraph BC6.672 ↩↩↩↩↩
Amendments to the Basis for Conclusions on IFRS 9, paragraph BC6.674 ↩↩↩↩↩
Amendments to the Basis for Conclusions on IFRS 9, paragraph BC6.678 ↩↩↩↩↩
August 2024 IASB meeting agenda paper 3, page 20 ↩↩
August 2024 IASB meeting agenda paper 3, page 20 ↩↩
Paragraph 6.10.1 of the Amendments to IFRS 9 ↩↩
Paragraph 2.3B of the Amendments to IFRS 9 ↩↩
For example, it is generally accepted that forecast transactions occurring far into the future are unlikely to be highly probable. However, in the context of a nature-dependent electricity contract, a purchaser assumes that it will continue to buy electricity over the hedged term (i.e. the contract term) based on its past and current usage unless it has information to the contrary (see IE153 of the Illustrative Example and BC6.672 of the Amendments to the Basis for Conclusions on IFRS 9). ↩↩
Including for an entity applying IFRS 19 Subsidiaries without Public Accountability: Disclosures ↩↩
"An entity is a net purchaser of electricity if it buys sufficient electricity to offset the sales of any unused electricity in the same market in which it sold the electricity. In determining whether an entity is a net purchaser of electricity, the entity shall consider reasonable and supportable information (that is available without undue cost or effort) about its past, current and expected future electricity transactions over a reasonable amount of time" (B2.7 and B2.8 of the Amendments to IFRS 9). ↩↩
"...an entity shall disclose by risk category quantitative information to allow users of its financial statements to evaluate the terms and conditions of hedging instruments and how they affect the amount, timing and uncertainty of future cash flows of the entity." ↩↩
Paragraph 30A(c)(iii) of the Amendments to IFRS 7 ↩↩

5 Contracts Referencing Nature-dependent Electricity

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