IASB amends IFRS 9 and IFRS 7 for renewable electricity contracts

The International Accounting Standards Board (IASB) has introduced targeted amendments to IFRS 9 Financial Instruments and IFRS 7 Financial Instruments: Disclosures, aimed at resolving challenges in accounting for electricity contracts reliant on uncontrollable natural factors, such as weather conditions. These contracts, often structured as power purchase agreements, present unique complexities due to their variability in electricity volumes.

The amendments apply specifically to contracts involving nature-dependent electricity. This term replaces the previously proposed ‘contracts for renewable electricity,’ reflecting feedback from stakeholders during the consultation process.

These contracts encompass agreements to buy, sell, or reference electricity from sources such as wind or solar power, which are subject to natural conditions.

Key Changes in IFRS 9

Own-Use Exemption Clarified

Under IFRS 9, contracts for non-financial items intended for an entity’s own use—known as the ‘own-use’ exemption—are excluded from the standard’s scope. However, applying this exemption has been challenging for nature-dependent electricity contracts due to fluctuations in volume, which may lead to excess electricity being sold back to the market.

The amendments clarify how entities should assess whether these contracts qualify for the own-use exemption. Key considerations include whether the entity is a net purchaser over a reasonable time frame, taking into account variability in electricity generation.

Improved Hedge Accounting

For contracts that do not qualify under the own-use exemption and are treated as derivatives, entities may seek to apply hedge accounting. However, the variability of electricity volumes can complicate this process.

The amendments address these issues by allowing entities to designate a variable nominal volume of forecasted purchases or sales as the hedged item, provided certain conditions are met. This change is designed to enhance the effectiveness and applicability of hedge accounting for these contracts.

Enhanced Disclosures under IFRS 7

To improve transparency, the amendments to IFRS 7 introduce additional disclosure requirements for contracts accounted for under the own-use exemption and for those designated as hedging instruments. Key requirements include:

• Nature of Variability: Entities must disclose contractual features that expose them to fluctuations in electricity volumes, as well as the risks associated with purchasing electricity beyond their usage needs.
• Unrecognised Commitments: Information on unrecognised commitments, including estimated future cash flows from these contracts, must be provided.
• Onerous Contract Assessment: Qualitative details on how entities evaluate whether a contract could become onerous.
• Impact on Financial Performance: Both qualitative and quantitative insights into the financial performance effects of the contracts, including associated costs and proceeds.
• Risk Disaggregation: For hedging instruments, disclosures must include disaggregated information about the terms and conditions by risk category.

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