IFRS 9 Incremental costs of obtaining a derivate
IFRS 9 Incremental costs of obtaining a derivate
Hi All,
I want to discuss on the above mention topic i.e. IFRS 9 : Capitalisation of Contract Cost related to a 10 year financial Power Purchase Agreement defined as derivate. If any one from the Forum can guide on the application of mentioned subject.
I understand that Capitalisation of Contract Cost under IFRS 15 is possible. Is it possible under IFRS 9?
Regards
I want to discuss on the above mention topic i.e. IFRS 9 : Capitalisation of Contract Cost related to a 10 year financial Power Purchase Agreement defined as derivate. If any one from the Forum can guide on the application of mentioned subject.
I understand that Capitalisation of Contract Cost under IFRS 15 is possible. Is it possible under IFRS 9?
Regards
Re: IFRS 9 Incremental costs of obtaining a derivate
I thought all transaction costs related to FVTPL assets were expensed...
Re: IFRS 9 Incremental costs of obtaining a derivate
Can you tell us what aspect of the PPA means it is a derivative contract?
Re: IFRS 9 Incremental costs of obtaining a derivate
If the contact is indeed a derivative in the scope of IFRS 9, you need to account for it as such, i.e. at FVTPL. If there are any costs associated with this contract (can you give examples?) I'm afraid you will have to expense them.
Cheers
Cheers
Re: IFRS 9 Incremental costs of obtaining a derivate
we didn't leave any hope for Jonny
But it would be interesting to hear the background of this transaction. How did you arrive at the conclusion that this is a derivative? Are you on the seller or buyer side?
But it would be interesting to hear the background of this transaction. How did you arrive at the conclusion that this is a derivative? Are you on the seller or buyer side?
Re: IFRS 9 Incremental costs of obtaining a derivate
Dear all and thanks for your reply
The PPA is a pure financial arrangement between a renewable electricity generator and a customer, that enables both parties to hedge against electricity market price volatility. It is a derivate under IFRS 9.
The cost are related to agency fees.
As the derivatre is designated as hedging instruments for future production I don't understand why the cost has to be immediately expensed in P&L. Can you please explain the logic?
Thanks
Regards
The PPA is a pure financial arrangement between a renewable electricity generator and a customer, that enables both parties to hedge against electricity market price volatility. It is a derivate under IFRS 9.
The cost are related to agency fees.
As the derivatre is designated as hedging instruments for future production I don't understand why the cost has to be immediately expensed in P&L. Can you please explain the logic?
Thanks
Regards
Re: IFRS 9 Incremental costs of obtaining a derivate
It is clear transaction costs will never be included in the carrying amount of a FVTPL instrument because the carrying amount will be updated everyday to the latest fair value, which does not take transaction costs into account. But, I'm not sure if IFRS 9 precludes to recognize such transaction costs as a separate asset (Prepaid Expenses) ....
Re: IFRS 9 Incremental costs of obtaining a derivate
Perhaps that is where the nature of the contract and why it's a derivative comes into it, it may be that the fees would appear appropriate to defer over the contract , depending..
Re: IFRS 9 Incremental costs of obtaining a derivate
Are you applying cash flow hedge accounting on this derivative? Assuming that you are, and that the designated hedged risk is the change in the electricity prices, even if you consider the agency fee as part of your derivative's fair value (and I'm not sure if you can, it really depends on the contract), the agency fee is not a component of your hedged risk and will always end up in P&L as ineffectiveness.
Re: IFRS 9 Incremental costs of obtaining a derivate
DJP wrote: ↑03 Nov 2020, 10:32 Are you applying cash flow hedge accounting on this derivative? Assuming that you are, and that the designated hedged risk is the change in the electricity prices, even if you consider the agency fee as part of your derivative's fair value (and I'm not sure if you can, it really depends on the contract), the agency fee is not a component of your hedged risk and will always end up in P&L as ineffectiveness.
I understand your point. Thanks. Yes, I am applying cash flow hedge accounting on this derivative. Would you expense the costs of the transaction in EBITDA or in financial charges?
Please note that the derivative is accounted in the net financial position.
Thanks
Regards
Re: IFRS 9 Incremental costs of obtaining a derivate
When it comes to P&L geography, IFRS does not provide much details. Where will you take your derivative's fair value changes once you recycle your cash flow hedge reserve? I am presuming you will take it to operating results since you are applying hedge accounting, and if so I would do the same with this agency fee (it seems that the fee relates to your operations, regardless). You can make policy where IFRS is not clear. You just need to be consistent then. Hope it helps!
Re: IFRS 9 Incremental costs of obtaining a derivate
Yes, I will take it to revenues. Thanks
Re: IFRS 9 Incremental costs of obtaining a derivate
Just to make it clear, I would not take the agency fee to the Revenue line. I would take it to Other operating expenses or some other similar line item.
Re: IFRS 9 Incremental costs of obtaining a derivate
I agree. I was reffering to the contract for difference (i.e. PPA)
Re: IFRS 9 Incremental costs of obtaining a derivate
I have been discussing further the matter also with the auditors. As PPA with a fixed price was ask by the bank under project financing to obtain the loan in certain conditions we are thinking to consider the transaction costs of the PPA in the amortized cost of the loan.
What are your thoughts?
Thanks
What are your thoughts?
Thanks
Re: IFRS 9 Incremental costs of obtaining a derivate
Do you mean the agency fees or the (derivative) PPA contract?
Re: IFRS 9 Incremental costs of obtaining a derivate
yes to the agency fees or to the contract?
Re: IFRS 9 Incremental costs of obtaining a derivate
In any case, I don't think you can consider either as a transaction cost of the loan. Entering into that contract may create the conditions for your obtaining the loan, but it is not a cost that you specifically incur to obtain the loan. Plus, according to you the contract seems to be a derivative.
Re: IFRS 9 Incremental costs of obtaining a derivate
This agency fee seems to relate exclusively to the PPA contract. Therefore, in my opinion, it cannot classify as a transaction cost of the loan.
Re: IFRS 9 Incremental costs of obtaining a derivate
What is the auditor telling you? Presumably they have presented a technical perspective