Proposed IFRS amendments set to change how companies account for renewable electricity contracts

Accounting and finance departments across Asia Pacific must wake up to the impact that evolving sustainability standards have on their profession, said experts at a regional accounting forum.

ACCA brown to green panel
Panellists discussed the impact of rising sustainability standards on the work of accounting and finance professionals at the Association of Chartered Certified Accountants (ACCA) Asia Pacific Dialogue 2024 in Hanoi, Vietnam. Image: ACCA

Newly proposed rules are set to change how accounting professionals report on renewable electricity contracts – a change that too few professionals in Asia Pacific are aware of, according to a global council member of the Association of Chartered Certified Accountants (ACCA).

On 8 May, the International Accounting Standards Board (IASB) published an exposure draft with proposed amendments to two parts of the International Financial Reporting Standards (IFRS), a set of global accounting rules aimed at standardising financial statements. 

These urgent amendments, which are being fast-tracked due to a rapid increase in companies signing power purchase agreements for renewable energy, take into account the intermittent nature of renewables, said the IASB.

“If you think IFRS 7 and 9 are hard enough, it’s going to get [harder],” said Merina Abu Tahir, who also sits on several boards of Malaysian public-listed companies including national utilities firm Tenaga Nasional. “They’re making amendments to [rules affecting] financial instruments.”

IFRS 7 outlines what assets or contracts companies should disclose in their financial statements, while IFRS 9 governs how a company’s assets and contracts should be classified and measured.

“[Renewable electricity] contracts often require buyers to take and pay for whatever amount of electricity is produced, even if that amount does not match the buyer’s needs at the time of production. These distinct market characteristics have created accounting challenges in applying the current accounting requirements, especially for long-term contracts,” it said.

The proposed amendments aim to ensure that financial statements “more faithfully reflect the effects that renewable electricity contracts have on a company,” it said, given increasing global demand for such contracts.

Specifically, IFRS 9 is being tweaked to address how ‘own-ruse requirements’ for renewable electricity contracts should apply and would allow hedge accounting if such contracts are used as hedging instruments.

The proposed amendments apply to renewable electricity contracts when the source of energy is nature-dependent and the contract exposes the purchaser to substantially “all the volume risk … through ‘pay-as-produced’ features”, said global accounting giant EY, in a report. Volume risk occurs when companies may have entered contracts to pay for high volumes of electricity produced via solar, wind or hydropower, even if not all of it ends up being used.

At the same time, disclosure requirements would be added under IFRS 7 to enable investors to understand the effects of these renewable electricity contracts on the company’s financial performance and future cash flows, said the IASB.

“The IASB intended the scope of the proposed amendments to be narrow enough to minimise the risk of unintended consequences,” said EY. It noted that the proposed amendments do not cover the accounting for renewables energy certificates (RECs).

Understanding the changes

Under the current rules, ‘own-use requirements’ allow companies to make an exception in accounting for non-financial items that are used for a company’s “expected purchase, sale or usage requirements”.

When it comes to renewable electricity, however, unused electricity might be sold to the grid if it is not stored. “The sale appears to breach the own-use requirement,” explained Aaron Saw, head of corporate reporting insights – financial at ACCA.

“If an entity uses the electricity in its operations, recognising fair value changes in profit or loss for these contracts does not provide useful information [to users of financial statements] about the performance of the entity,” Saw told Eco-Business. “Instead, an entity should account for these contracts in the same way as other procurement contracts.”

While some effort will be required early on to apply the proposed amendments, particularly in terms of the hedge accounting requirements, the amendments are ultimately aimed at reducing the accounting burden on companies preparing their financial statements, he said.

The IASB’s proposed amendments are an urgent response to stakeholders’ request for clarity and extra guidance in applying the own-use requirements to power purchase agreements. This is especially as more companies are expected to enter into contracts for the purchase of renewable electricity, said Saw.

Due to this urgency, the IASB shortened its comment period for the exposure draft from 120 days to 90 days. It is currently inviting public feedback on the exposure draft until August 2024 and aims to finalise changes by the end of this year.

Saw explained that because of the narrow and urgent scope of the proposed amendments for renewable electricity contracts, the shorter comment period is provided for under the IASB’s due process handbook.

“However, a shortened comment period should not become a trend as stakeholders need time to consider the practicality of proposals. Some of which are complex and the effects could be far-reaching as the IASB is setting standards for the world,” he said. Over 140 jurisdictions around the world require the use of the IFRS’ accounting standards.

For now, accounting professionals should ensure they are familiar with the proposed amendments for renewable electricity contracts and respond to the IASB’s exposure draft, said ACCA’s Merina.

Financial statements affected

Merina also stressed that accounting professionals should pay greater attention to how new sustainability-linked standards are reshaping global accounting standards. The most prominent of these changes come in the form of the International Sustainability Standards Board’s (ISSB’s) S1 and S2, which cover general sustainability concerns and climate disclosures respectively.

“Sustainability reporting is not just something that you find in [company] annual reports – it is going to translate down to your financial statements,” she said. These considerations will not just change how accountants prepare financial standards but also how standards are drafted going forward,” she said.

Worryingly, however, an ACCA survey published in November found that nearly half of senior finance professionals have yet to produce a plan to reduce their companies’ carbon emissions. Worse still, nearly 70 per cent of those without a plan have no intention of developing one, a finding that Merina found worrying.

“Chief financial officers (CFOs) and the finance functions need to have a plan [to reduce emissions],” she said, given the rise of new sustainability standards and the urgency of the global transition to clean energy.

In fact, finance departments should increasingly take the lead on monitoring sustainability metrics within a company, added Jonathan Back, chief financial officer at ACEN Corporation, a subsidiary of Filipino conglomerate Ayala Group.

Although not all of Ayala’s business are directly involved in clean energy the way ACEN is, the group as a whole has committed to achieving net-zero emissions by 2050.

“This means that the “watchdogs” for sustainability are mostly in the finance function, in Ayala companies,” said Back, encouraging other finance professionals to adopt a similar approach. “I think people in finance, especially in companies that aren’t focused on green businesses, can be at forefront [of sustainability].”

This means, however, that finance departments need to ask for the environmental, social and governance (ESG) data from other departments as well as from their company’s supply chains, he said.

The demand for sustainability-related data is only growing among stakeholders. Merina shared that as a chairperson and board member, she regularly questions finance chiefs about the integrity of their data, including sustainability metrics that might come from chief sustainability officers.

“It is very important to have that assurance [of sustainability-related data] coming from the CFO,” she said, especially given the rise in sustainability-related standards.

Media access to the ACCA Asia Pacific Dialogue 2024, held in Hanoi, Vietnam, was facilitated by ACCA.


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