IASB’s Proposed amendments on renewable electricity contracts: implications for Malta

There seems to be an overarching struggle between applying strict rules and requirements and catering to different-sized businesses with varying capacities in context of the unpredictability of renewable energy sources


By Lina Klesper LL.M,

International Legal Assistant, PKF Malta

The International Accounting Standards Board (IASB) recently published an Exposure Draft titled "Contracts for Renewable Electricity" in May 2024. This draft proposes narrow-scope amendments aimed at enhancing the accuracy and transparency of financial statements in reflecting the impacts of renewable electricity contracts, often referred to as Power Purchase Agreements (PPAs). This development is not just a technical adjustment in accounting standards but carries significant implications for companies worldwide, including those in Malta.

The IASB is responsible for developing and promoting International Financial Reporting Standards (IFRS) used by companies globally to prepare their financial statements. The increasing prevalence of PPAs has highlighted the need for more specific accounting guidance as the current standards may not adequately capture the unique aspects of these contracts, potentially leading to inconsistencies and a lack of transparency in financial reporting. The corporate PPA market has grown enormously over the past years, continuously reaching new highs and catalysing significant sums of investment for the energy transition. Today, PPAs are the centrepiece of companies' sustainability strategies.

The Exposure Draft proposes several narrow-scope amendments to existing IFRS standards. These amendments aim to bring more clarity to the scope of the ´own use exemption´ of IFRS 9, the hedge accounting requirements of IFRS 9 and the disclosure requirements of IFRS 7.

Overall, the amendments seek to provide clear guidelines on how renewable electricity contracts should be recognized and measured in financial statements.  This includes specifying whether these contracts should be accounted for as financial instruments or as lease agreements. The draft proposes enhanced disclosure requirements to provide stakeholders with better insights into the nature, terms, and financial impacts of renewable electricity contracts. This includes information on contract duration, pricing mechanisms, and any contingent considerations. Moreover, the amendments aim to align financial reporting more closely with companies’ sustainability goals, ensuring that the economic benefits of renewable electricity contracts are clearly reflected in financial statements.

Not included in the Exposure draft project on PPAs are renewable energy certificates (RECs), which typically accompany contracts for renewable energy and are of considerable importance for entities.  The IASB concluded that dealing with RECs can be done separately and best in a potential project on pollutant pricing mechanisms considering the possible delay for the current project

For companies in Malta, these proposed amendments by the IASB have several important implications as they potentially affect any entity that enters into PPAs with the characteristics described in this Exposure Draft.

With the enhanced disclosure requirements, Maltese companies engaging in PPAs will need to provide more detailed information in their financial statements. On the one hand, this transparency will not only help investors and stakeholders better understand the financial health and sustainability initiatives of these companies but also foster trust and confidence in their financial reporting. On the other hand, adopting the new standards may entail additional costs related to updating accounting systems, training staff, and ensuring compliance. Companies will need to invest resources to effectively implement these changes. The specific nature of renewable electricity contracts can add complexity to accounting processes. Companies will need to develop a thorough understanding of the new guidelines to ensure accurate and consistent application across their financial statements. However, the IASB concluded that the benefits of the disclosure requirements would outweigh the costs of applying the requirements considering that necessary information is usually readily available to entities.

Looking at the bigger picture of the EU’s Green Deal and the push towards carbon neutrality by 2050, which require substantial investments in renewable energy, by adopting these amendments, Maltese companies will be better positioned to align their financial reporting with the broader sustainability objectives of the EU, demonstrating their commitment to environmental responsibility. This can lead to a competitive advantage for Maltese companies since companies that accurately and transparently report their renewable electricity contracts can gain a competitive edge. Investors are increasingly prioritizing sustainability and environmental, social, and governance (ESG) factors in their decision-making processes. By showcasing their commitment to renewable energy through clear and detailed financial reporting, Maltese companies can attract more investment and improve their market standing.

Currently, the IASB is inviting feedback on the proposed amendments until 7 August 2024. Considering the urgent need for the amendments as the use of PPAs is expected to increase due to the high demand for renewable electricity, the IASB aims to finalise any changes by the end of 2024 and make the new requirements available for companies to apply as soon as possible after they are finalised.

Already in the official Exposure Draft document, two members of the IASB, Bruce Messrs Mackenzie and Robert Uhl, expressed alternative views to the proposed amendments. They argue that the proposed exception from IFRS 9 for renewable electricity contracts allows companies to predictably sell excess electricity, potentially leading to misleading financial reporting. They believe that this leniency compromises the neutrality of accounting standards and that any issues should be addressed through presentation adjustments rather than exceptions.

First comments on the amendments suggest that more clarity might be necessary for some requirements to reflect practical challenges better. One comment letter proposes to include more examples and guidelines in respect of the requirements regarding volume uncertainty and more flexible criteria due to the unpredictable nature of renewable energy sources.

There seems to be an overarching struggle between applying strict rules and requirements and catering to different-sized businesses with varying capacities in context of the unpredictability of renewable energy sources. The amendments have to keep a certain degree of flexibility while maintaining a reasonable level of detail, that does not put a disproportional reporting burden on smaller entities. Additional guidance might likely be needed as well as discussion of a later effective date for such reporting requirements.

To conclude, the IASB’s Exposure Draft on Contracts for Renewable Electricity represents a critical step towards enhancing the transparency and accuracy of financial reporting in the context of renewable energy. For companies in Malta, these proposed amendments offer an opportunity to better reflect their sustainability initiatives, align with EU goals, and gain a competitive advantage in a rapidly evolving market. While the transition to the new standards may present challenges, the stakeholder-oriented approach of the IASB gives hope for more effective reporting guidance in the near future.

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