Solar Power Purchase Agreement Accounting

12 Apr 2021

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Solar Power Purchase Agreement Accounting

There are many good reasons to take an AAE to cover some or all of your electricity needs: financial, environmental, social, regulatory and improving your public profile, to name a few. However, AAEs are long-term and, in general, complex commitments. Before signing on the dotted line, you should take the time to understand how the AAE works and how the different provisions of an AAE can affect accounting. This will not only avoid surprises, but also help negotiate AAEs to get the results of the financial information you want (or at least avoid the unwanted). PPVs are more likely to meet the definition of a derivative, but even for PPPAs, depending on the structure of the agreement, you may have a lease agreement with an embedded derivative. In this regard, the accounting of AAEs is not an option, but a consequence of the specific contractual provisions. PpA therefore offers industrial companies a good opportunity to source long-term and reliably with the green electricity requested. However, the impact on accounting and, indirectly, on risk information should be reviewed in a full timely manner. In addition to achieving sustainable development goals, companies have also entered the PPAs for economic and branding reasons. AAEs are economically attractive because they often contain pre-agreed prices for a given period, which limits the variability of electricity prices, while direct purchases by renewable producers ensure the long-term affordability of energy costs. First, the AAE must be reviewed to determine whether or not it meets all the characteristics of an embedded derivative. A controversial point in this context could be considered a criterion for contract performance on the basis of a “subliminal” value, since the final purchase volume is often only fully measured after actual production. Of course, it is not possible to accurately predict this volume for a wind farm, so an appropriate determination of the volume of the contract in the past has generally been considered unmet.

However, IFRS 9 contains implementation guidelines (IFRS 9.IG. B.8), which now contain an example in which the amount of a derivative is not determined from the outset. In the case of an AAE, it is therefore possible to use the expected values, which are generally available for wind performance. In the absence of significant acquisition payments, an AEA should be able to meet all the criteria for an IFRS 9 derivative. Derivative accounting assumes that the contract is recorded on the balance sheet on the basis of the fair value of the contract.