Latest IFRIC agenda decision - do virtual power purchase agreements contain a lease?

Fact pattern

• An electricity retailer and the supplier of electricity (the windfarm) are registered participants in an electricity market
• They are unable to enter into contracts directly with each other to buy and sell electricity because purchases and sales are made via the market’s electricity grid
• The spot price for these purchases and sales is set by the market operator
• The electricity retailer is therefore buying electricity from the grid (and not directly from the windfarm)
• The electricity retailer enters into an agreement with the windfarm as follows:
  • To swap the spot price per megawatt of electricity the windfarm supplies to the grid during the 20-year term of the agreement for a fixed price per megawatt, settled net in cash. The windfarm is effectively receiving a fixed price per megawatt for the electricity it supplies to the grid during the 20-year agreement period.
  • All renewable energy credits that accrue from use of the windfarm are transferred to the electricity retailer.

Question:

Does this contract contain a lease? That is, does the contract convey the right to control the use of an identified asset for a period of time in exchange for consideration (IFRS 16, paragraph 9)?

Rationale for agenda decision:

To control the use of an identified asset for a period of time, throughout the period of use, the electricity retailer must have both (IFRS 16.B9):

• The right to obtain substantially all of the economic benefits from using the identified asset
• The right to direct the use of that asset.

To meet (a) above, IFRS 16.B21 states that a customer can obtain economic benefits from use of the asset directly or indirectly in many ways, e.g. using, holding or sub-leasing the asset.

It also states that economic benefits from using the asset include its primary output and by-products as well as other economic benefits that could be realised from a commercial transaction with a third party.

In this fact pattern, the economic benefits from using the windfarm include the electricity the windfarm produces (primary output) and the renewable energy credits (by-product).

The agreement results in the electricity retailer settling with the windfarm, the difference between the fixed price and the spot price per megawatt supplied by the windfarm to the grid throughout the 20-year contract term. In this case, the agreement does not convey the right or obligation for the retailer to obtain any of the electricity (primary output) the windfarm produces and supplies to the grid over the 20-year period.

Although the electricity retailer has the right to obtain the renewable energy credits (by-product), this would not be substantially all of the economic benefits from using the windfarm because it has no right to obtain any of the electricity the windfarm actually produces throughout the 20-year period.

The electricity retailer therefore does not have the right under IFRS 16.B9(a) to obtain all the economic benefits from using the windfarm because it only has rights to the by-product.

Conclusion

The swap contract between the electricity retailer and the windfarm does not contain a lease.

The principles and requirements in IFRS standards provide an adequate basis for an entity to assess whether it has the right to substantially all of the economic benefits from using the identified asset.

The Committee therefore decided not to add a standard-setting project to its work plan.