Electricity contract

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Leo
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Joined: 05 Apr 2020, 22:31

Electricity contract

Post by Leo »

Hi,

I have a question, our company has negociate a electricity contract with a wind power company. In the contract, we made the commitment to the electricity supplier to receive the totality of the electricity that the energy company could produce during the next 20 years. (4M€ per year as estimation costs)

Electricity produced by this company will first go to the government owned electricity company, which will re-direct the electricity to us.

Do you think that could be in the scope of IFRS16 or any other accounting standard?

My analyse would be that this isn't in the scope of IFRS16, because it's electricity and it isn't identifiable. So, This would be in the scope of IAS37.
So, Do I have to assess the value of the contract (Total fees that we pay in the next 20 years) or, I should only mention it in the annexes, as a off balance sheet commitment and book the monthly fees in rent?

What's opinion please.

Thank you very much.
Lasa1
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Joined: 07 Oct 2020, 11:29

Re: Electricity contract

Post by Lasa1 »

Hello Leo,

First time that I give my opinion here so hope I won t confuse more.
Should not you consider the production plant as the identified asset? The plant will be fully dedicated to produce the electricity for your company.

Regards
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Marek Muc
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Re: Electricity contract

Post by Marek Muc »

Are the power plants specifically identified in the contract? Or is it up to the power company to decide how many power plants it will deploy?
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Marek Muc
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Re: Electricity contract

Post by Marek Muc »

it's also important to know who makes decisions about quantity and timing of the delivery of power
see Example 9c to IFRS 16
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JRSB
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Re: Electricity contract

Post by JRSB »

Have you really committed for 20-years, or an initial 3 years with a potential 20 year period of service?
"I am always ready to learn although I do not always like being taught" - Churchill
Leo
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Joined: 05 Apr 2020, 22:31

Re: Electricity contract

Post by Leo »

Hi guys,

Thank you for your reply.

Actually, we are negotiating with the supplier and the contract isn't finalized yet.

The consultant told us that some of those type of contract could be treated as IFRS16, all depends on how to write the contract. We clearly don't want it to be in the scope of IFRS16 because it'll increase our net debt.

How should we write the contract in order to not treat it as IFRS16 and if not in the scope of IFRS16 which standard should we use?

The contract isn't about the plant, its only about the electricity. The supplier has approached the bank to find a company interested in buying their electricity production. And We are interested. So that's the story.

And the commitment is between, 15-20 years, no option.

Thank you very much.
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Marek Muc
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Re: Electricity contract

Post by Marek Muc »

I would make sure that the right to direct the use of the power plant remains within the wind power company. Have a read here:
https://ifrscommunity.com/knowledge-bas ... ct-the-use

and read all three variants of Example 9 (A, B and C) to IFRS 16, they cover an arrangement very similar to yours.

If the contract won't be a lease, then it will be an executory contract, so nothing will be recognised before actual delivery of the energy. I would say that technically it won't be in the scope of any IFRS unless it becomes onerous (in which case IAS 37 applies)

Plus take a look here:
https://ifrscommunity.com/knowledge-bas ... -contracts
Radhika
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Joined: 18 Jul 2020, 17:47

Re: Electricity contract

Post by Radhika »

Hi Leo,

Since your company has the right to purchase the whole of electricity produced by the supplier, therefore it seems that the company obtains substantially all of the economic benefit from the contract. However, if the supplier has the right to sell the remaining capacity to another customer, then it can be argued that your company does not have substantive right over the output produced.

For electricity, the payment terms are variable since they are based on consumption and therefore the lease would be treated as variance lease contract. Variable lease contract does not require recognition in the books and is charged to P&L as and when the consumption happens.
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Marek Muc
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Re: Electricity contract

Post by Marek Muc »

Radhika,
Obtaining substantially all of the economic benefits is not sufficient to conclude that the contract is a lease, see here:

https://ifrscommunity.com/knowledge-bas ... g-a-lease/
Radhika
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Re: Electricity contract

Post by Radhika »

Yes it is a primary indicator that there exist a lease. Therefore, if you read my reply i have said we have to also see if the supplier has right to sell to other parties when the full capacity is not utilised by the Company. In the case of electricity contracts fully sold to the Company it is difficult argument to state that there is no lease. I have seen many of these cases and they are treated as lease.
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Marek Muc
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Re: Electricity contract

Post by Marek Muc »

In the examples that you've seen for electricity contracts, how was the right to direct the use of the power plant effected by lessees?
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