IFRS 9 Incremental costs of obtaining a derivate

All topics related to IFRS Standards.
Post Reply
Jonny
Posts: 90
Joined: 22 May 2020, 11:09

IFRS 9 Incremental costs of obtaining a derivate

Post by Jonny »

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
JRSB
Trusted Expert
Posts: 1309
Joined: 01 Mar 2020, 01:10
Location: UK

Re: IFRS 9 Incremental costs of obtaining a derivate

Post by JRSB »

I thought all transaction costs related to FVTPL assets were expensed...
JRSB
Trusted Expert
Posts: 1309
Joined: 01 Mar 2020, 01:10
Location: UK

Re: IFRS 9 Incremental costs of obtaining a derivate

Post by JRSB »

Can you tell us what aspect of the PPA means it is a derivative contract?
DJP
Trusted Expert
Posts: 345
Joined: 26 Jun 2020, 15:57

Re: IFRS 9 Incremental costs of obtaining a derivate

Post by DJP »

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
User avatar
Marek Muc
Site Admin
Posts: 3229
Joined: 15 Oct 2018, 17:21
Contact:

Re: IFRS 9 Incremental costs of obtaining a derivate

Post by Marek Muc »

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?
Jonny
Posts: 90
Joined: 22 May 2020, 11:09

Re: IFRS 9 Incremental costs of obtaining a derivate

Post by Jonny »

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
pub_acco
Trusted Expert
Posts: 328
Joined: 19 Mar 2020, 16:40

Re: IFRS 9 Incremental costs of obtaining a derivate

Post by pub_acco »

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) ....
JRSB
Trusted Expert
Posts: 1309
Joined: 01 Mar 2020, 01:10
Location: UK

Re: IFRS 9 Incremental costs of obtaining a derivate

Post by JRSB »

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..
DJP
Trusted Expert
Posts: 345
Joined: 26 Jun 2020, 15:57

Re: IFRS 9 Incremental costs of obtaining a derivate

Post by DJP »

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.
Jonny
Posts: 90
Joined: 22 May 2020, 11:09

Re: IFRS 9 Incremental costs of obtaining a derivate

Post by Jonny »

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
DJP
Trusted Expert
Posts: 345
Joined: 26 Jun 2020, 15:57

Re: IFRS 9 Incremental costs of obtaining a derivate

Post by DJP »

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!
Jonny
Posts: 90
Joined: 22 May 2020, 11:09

Re: IFRS 9 Incremental costs of obtaining a derivate

Post by Jonny »

Yes, I will take it to revenues. Thanks
DJP
Trusted Expert
Posts: 345
Joined: 26 Jun 2020, 15:57

Re: IFRS 9 Incremental costs of obtaining a derivate

Post by DJP »

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.
Jonny
Posts: 90
Joined: 22 May 2020, 11:09

Re: IFRS 9 Incremental costs of obtaining a derivate

Post by Jonny »

I agree. I was reffering to the contract for difference (i.e. PPA)
Jonny
Posts: 90
Joined: 22 May 2020, 11:09

Re: IFRS 9 Incremental costs of obtaining a derivate

Post by Jonny »

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
DJP
Trusted Expert
Posts: 345
Joined: 26 Jun 2020, 15:57

Re: IFRS 9 Incremental costs of obtaining a derivate

Post by DJP »

Do you mean the agency fees or the (derivative) PPA contract?
Jonny
Posts: 90
Joined: 22 May 2020, 11:09

Re: IFRS 9 Incremental costs of obtaining a derivate

Post by Jonny »

DJP wrote: 12 Nov 2020, 14:29 Do you mean the agency fees or the (derivative) PPA contract?
yes
DJP
Trusted Expert
Posts: 345
Joined: 26 Jun 2020, 15:57

Re: IFRS 9 Incremental costs of obtaining a derivate

Post by DJP »

yes to the agency fees or to the contract?
DJP
Trusted Expert
Posts: 345
Joined: 26 Jun 2020, 15:57

Re: IFRS 9 Incremental costs of obtaining a derivate

Post by DJP »

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.
Jonny
Posts: 90
Joined: 22 May 2020, 11:09

Re: IFRS 9 Incremental costs of obtaining a derivate

Post by Jonny »

DJP wrote: 12 Nov 2020, 15:03 yes to the agency fees or to the contract?
agency fees
DJP
Trusted Expert
Posts: 345
Joined: 26 Jun 2020, 15:57

Re: IFRS 9 Incremental costs of obtaining a derivate

Post by DJP »

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.
JRSB
Trusted Expert
Posts: 1309
Joined: 01 Mar 2020, 01:10
Location: UK

Re: IFRS 9 Incremental costs of obtaining a derivate

Post by JRSB »

What is the auditor telling you? Presumably they have presented a technical perspective
Jonny
Posts: 90
Joined: 22 May 2020, 11:09

Re: IFRS 9 Incremental costs of obtaining a derivate

Post by Jonny »

JRSB wrote: 12 Nov 2020, 19:00 What is the auditor telling you? Presumably they have presented a technical perspective
Not really. They are still thinking about it but looks like that it is ok for them
Post Reply