Nature-dependent Electricity: Amendments to IFRS 9 and IFRS 7

In recent years, the use of electricity from renewable energy sources – particularly wind and solar – has increased significantly. These energy sources are nature-dependent, meaning that electricity production varies with weather conditions and other environmental factors. Such fluctuations pose a particular challenge for companies that enter into – physical or virtual – PPAs based on these energy sources with variable amounts. In response to these developments, the IASB has amended IFRS 9 (Financial Instruments) and IFRS 7 (Financial Instruments: Disclosures).

The amendments originate from a request submitted to the IFRS Interpretations Committee concerning the application of the so-called “own use exemption” in IFRS 9.2.4 in the context of physical PPAs - which are aimed at the actual supply of electricity. Due to the lack of clear rules and the resulting diversity in accounting practice as well as the foreseeable increase in relevance of the topic, it was referred to the IASB. Subsequently, the accounting treatment of virtual PPAs – which are aimed at compensation payments between contractually agreed prices and actual market prices – was included and both were carried over into an overall project.

The “own use exemption” requires the exclusion of certain contracts for the purchase or sale of non-financial items from the scope of IFRS 9 and their treatment as executory contracts that would otherwise be accounted for as derivatives. A prerequisite is that such contracts are entered into and held for the purpose of own use (IFRS 9.2.4). In the context of contracts ref-erencing nature-dependent electricity, short-term sales of excess electricity may become necessary due to fluctuations in the amounts produced, thereby raising questions about the applicability of the “own use exemption.”

The application of the “own use exemption” for contracts referencing nature-dependent electricity is linked to the assessment of a new criterion as a result of the amendments. Accordingly, the reporting company must be a “net purchaser” of electricity during the existing contract term (IFRS 9.B2.7 f.). This is aimed at the question of whether such contracts are entered into and continue to be held in line with expected usage requirements. Thus, interim sales of electricity that is not immediately used do not, in themselves, preclude the application of the “own use exemption.” However, the electricity purchased by the reporting entity must offset its sales of unused electricity in the market where the sales occurred. A “reasonable amount of time” – typically up to 12 months, taking into account specific (e.g., seasonal) fluctuations – must be assumed in making this assessment.

If a contract referencing nature-dependent electricity is used to hedge cash flows from forecast electricity purchases and sales, the amendments now permit the designation of a variable nominal amount of expected purchases and sales as a hedged item (cash flow hedge). The other requirements of IFRS 9 for hedge accounting remain unaffected. Thus, the forecast purchases and sales must in principle be “highly probable”. If the cash flows from the contract designated as a hedging instrument are conditional on the occurrence of a forecast transaction designated as the hedged item, it can be presumed that the hedged item is “highly proba-ble”.

The IASB emphasizes the narrowly defined scope of the amendments and also refers to the forthcoming post-implementation review (PIR) of the hedge accounting rules, which aims at a broader evaluation.

If the amendments to the hedge accounting rules are applied, the requirements of IFRS 7.23A must be complied with and the information to be disclosed must be disaggregated by risk category.

Mandatory first-time application applies to reporting periods beginning on or after January 1, 2026. Earlier application is generally permitted, subject to EU endorsement. This is expected before the mandatory effective date.

Specific transition provisions have been provided for affected matters. Accordingly, the rules regarding the “own use exemption” are generally to be applied retrospectively, but without mandatory restatement of previous reporting periods. Contracts that, as a result of the amendments, fall outside the scope of IFRS 9 may be irrevocably designated at fair value through profit or loss in accordance with IFRS 9.2.5 at initial application. The hedge accounting provisions are to be applied prospectively.

The use of renewable energy sources is becoming more and more important and therefore the relevance of contracts that may fall within the scope of the amendments to IFRS 9 and IFRS 7 is also increasing. The accounting treatment of such contracts is specified by the amendments. This may result in potential simplifications, for example, if contracts in the future fall within the scope of the “own use exemption” which previously were not eligible for it and were therefore accounted for as derivatives. In these cases, time-consuming and complex fair value measurements might become unnecessary. Furthermore, the application of hedge accounting enabled by the amendments for the described scenarios could be used to reduce earnings volatility that would otherwise arise. Finally, the expanded disclosures for contracts within the scope of the amendments must be taken into account, as they may affect internal reporting tools and structures, with the associated effort in the preparation process also needing consideration.