Electricity revenue recognition example

Electricity revenue recognition example

Application of the five-step model

Facts: Bundle Seller Co (‘Seller’) and Bundle Buyer Co (‘Buyer’) executed an agreement for the purchase and sale of 1oMW of electricity per hour and the associated renewable energy credits (‘RECs’) (one REC for each MWh) at a fixed bundled price (‘the agreement’ or ‘the PPA’). The contract term begins on 1 January 20X1 and ends on 31 December 20X4, and the fixed bundled price during each of those respective years is $200, $205, $210 and $215.

The increase in the bundled price represents the increase in the forward price of electricity and RECs over the term of Electricity revenue recognition examplethe agreement as of the acquisition date. Control, including title to and risk of loss related to the electricity, will pass and transfer on delivery at a single point on the electricity grid. Control, including title to and risk of loss related to RECs, will pass and transfer when the associated electricity is delivered.

Seller and other market participants frequently execute contracts for the purchase and sale of electricity and RECs on a stand-alone basis.

Seller concluded that this arrangement does not contain a lease (that is, no property, plant or equipment is explicitly or implicitly identified). The electricity element of this arrangement qualifies for the ‘own use’ exception and thus is not accounted for as a derivative. The REC element has no net settlement characteristics. As such, each element of this agreement is within the scope of IFRS 15.

Electricity revenue recognition – IFRS 15 step-by-step

Step 1 – Identify the contract with a customer

This agreement, including each of its elements (that is, electricity and RECs), is within the scope of the standard, and collection of the contract consideration is considered probable.

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Transaction price power and utilities under IFRS 15 – All best read

Determining the transaction price power and utilities

The determination of the transaction price in many power and utilities contracts will be fairly straightforward, particularly where the contract pricing and contract quantities are fixed; however, in practice, reporting entities often enter into contracts that contain index-based pricing, variable volume, or both.

For example, Seller might enter into a requirements contract to sell electricity to Buyer at predetermined prices, but volumes are not known at contract inception. Uncertainty exists with respect to the total consideration to be received by Seller over the term of the contract. Seller might be able to elect a practical expedient to recognise revenue based on the amount invoiced, if it directly corresponds with the value to the customer of Seller’s performance completed to date.

Contracts that contain forms of variable consideration, significant financing components, non-cash consideration and/or consideration payable to a customer are likely to be more complex and will require judgement.

Variable consideration power and utilities

Variable consideration should be estimated using the expected value method or the most likely amount method. This is not a ‘free choice’. An entity needs to consider which method it expects to better predict the amount of consideration to which it will be entitled and apply that method consistently for similar types of contract.

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IFRS 15 Power purchase agreement

IFRS 15 Power purchase agreement

It is common for customer contracts within the power and utilities industry to contain multiple performance obligations. It is essential that power and utilities entities evaluate their portfolio of customer contracts in order to identify explicit and implicit promises to transfer a distinct good or service to a customer.

A promise to transfer a series of distinct goods that are substantially the same and that have the same pattern of transfer to the customer is a performance obligation known as a ‘series’. Contracts for the sale of electricity, and many contracts for the sale of gas to residential and small commercial and industry clients, would represent such a promise.

Sometimes, two products (such as gas and electricity) are sold together. Where multiple products are sold simultaneously, generally:

  1. Gas and electricity are distinct, because (a) a customer can benefit from either gas or electricity on its own (that is, the customer can sell gas and electricity, on a stand-alone basis, into the marketplace, etc.), and (b) the promise to transfer gas or electricity is separately identifiable from other promises in the contract.
  2. The performance obligation to deliver gas and electricity, in many cases, is satisfied over time, since the customer simultaneously receives and consumes the benefits provided by the entity’s performance as the entity performs. This conclusion might not be applicable for gas or other commodity contracts, where the customer has storage facilities and does not consume the benefits of the commodity immediately as it is delivered.
  3. Each delivery of gas or electricity in the series, that the entity promises to transfer to the customer, meets the criteria to be a performance obligation satisfied over time, and the same method will be used to measure the entity’s progress towards complete satisfaction of the performance obligation to transfer each distinct delivery of gas or electricity in the series to the customer.

Judgement is required to identify performance obligations in power and utilities contracts. In some jurisdictions, distribution and energy might be distinct performance obligations; while, in others, energy and distribution might be a single integrated performance obligation. This will depend on a number of factors, including whether the customer can choose amongst retailers and the relationships between the providers of distribution, the retailer and the end customer.

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Identified asset – 2 Complete with comprehensive examples

Identified asset

a term from IFRS 16 Leases. Let’s see what it is all about….

A lease is a contract, or part of a contract, that conveys the right to use an asset (the underlying asset) for a period of time in exchange for consideration.

The key factors to consider when applying the lease definition are as follows.

Identified asset

1. Specified asset

An asset can be either explicitly specified in a contract (e.g. by a serial number or a specified floor of a building) or implicitly specified at the time it is made available for use by the customer. (IFRS 16.B13, IFRS 16.BC111)

Food for thought – What does ‘implicitly specified’ mean?

An asset is implicitly specified if the facts and circumstances indicate that the supplier can fulfil its obligations only by using a specific asset. This may be the case if the supplier has only one asset that can fulfil the contract. For example, a power plant may be an implicitly specified asset in a power purchase contract if the customer’s facility is in a remote location with no access to the grid, such that the supplier cannot buy the required energy in the market or generate it from an alternative power plant.

In other cases, an asset may be implicitly specified if the supplier owns a number of assets with the required functionality, but only one of those assets can realistically be supplied to the customer within the contracted time-frame – i.e. the supplier does not have a substantive right to substitute an alternative asset to fulfil the contract – see 3.3. For example, a supplier may own a fleet of vessels but only one vessel that is in the required geographic area and not already being used by other customers.

1.1 Capacity portions

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Measurement of investment property

Measurement of investment property


Control of real estate can be obtained through:

  • direct acquisition of real estate;
  • construction of real estate; or
  • leasing of real estate, under either operating or finance leases.

Entities normally perform strategic planning before the acquisition, construction or leasing, to assess the feasibility of the project.

Entities might incur costs attributable to the acquisition, construction or leasing of real estate, during this first step of the cycle. Entities might also enter into financing arrangements to secure the liquidity required for the acquisition and construction of real estate.

The direct acquisition of investment property is presented here and the lease of investment property is presented here (Landlord lease accounting).

In this narrative the investment properties under construction (i.e. initial recognition of the development of real estate) and subsequent measurement of investment properties are handled.

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Disclosures Critical estimates judgements and errors in IAS 8

Critical estimates judgements and errors

The preparation of financial statements requires the use of accounting estimates which, by definition, will seldom equal the actual results. Management also needs to exercise judgement in applying the group’s accounting policies. (IAS 1.122, IAS 1.125)

This note provides an overview of the areas that involved a higher degree of judgement or complexity, and of items which are more likely to be materially adjusted due to estimates and assumptions turning out to be wrong. Detailed information about each of these estimates and judgements is included in other notes together with information about the basis of calculation for each affected line item in the financial statements.

In addition, this note also explains where there have been actual adjustments this year as a result of an error and ofCritical estimates judgements and errors  Critical estimates judgements and errors  Critical estimates judgements and errors  Critical estimates judgements and errors  Critical estimates judgements and errors  Critical estimates judgements and errors  Critical estimates judgements and errors  Critical estimates judgements and errors changes to previous estimates.

[Entities with operations in the UK, or that are doing a significant amount of business with the UK, should consider the extent to which additional disclosures are necessary to explain the impact of Brexit-related risks on their financial statements arising from the UK’s Brexit decision, see below.]

(a) Significant estimates and judgements

The areas involving significant estimates or judgements are disclosed in other areas of the notes to facilitate a complete overview of each IFRS subject/Note disclosure. These significant estimates or judgements are:

Estimates and judgements are continually evaluated. They are based on historical experience and other factors, including expectations of future events that may have a financial impact on the entity and that are believed to be reasonable under the circumstances.

11(b) Correction of material error in calculating depreciation

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Example accounting policies

Example accounting policies

Get the requirements for properly disclosing the accounting policies to provide the users of your financial statements with useful financial data, in the common language prescribed in the world’s most widely used standards for financial reporting, the IFRS Standards. First there is a section providing guidance on what the requirements are, followed by a comprehensive example, easy to tailor to the specific needs of your company.Example accounting policies

Example accounting policies guidance

Whether to disclose an accounting policy

1. In deciding whether a particular accounting policy should be disclosed, management considers whether disclosure would assist users in understanding how transactions, other events and conditions are reflected in the reported financial performance and financial position. Disclosure of particular accounting policies is especially useful to users where those policies are selected from alternatives allowed in IFRS. [IAS 1.119]

2. Some IFRSs specifically require disclosure of particular accounting policies, including choices made by management between different policies they allow. For example, IAS 16 Property, Plant and Equipment requires disclosure of the measurement bases used for classes of property, plant and equipment and IFRS 3 Business Combinations requires disclosure of the measurement basis used for non-controlling interest acquired during the period.

3. In this guidance, policies are disclosed that are specific to the entity and relevant for an understanding of individual line items in the financial statements, together with the notes for those line items. Other, more general policies are disclosed in the note 25 in the example below. Where permitted by local requirements, entities could consider moving these non-entity-specific policies into an Appendix.

Change in accounting policy – new and revised accounting standards

4. Where an entity has changed any of its accounting policies, either as a result of a new or revised accounting standard or voluntarily, it must explain the change in its notes. Additional disclosures are required where a policy is changed retrospectively, see note 26 for further information. [IAS 8.28]

5. New or revised accounting standards and interpretations only need to be disclosed if they resulted in a change in accounting policy which had an impact in the current year or could impact on future periods. There is no need to disclose pronouncements that did not have any impact on the entity’s accounting policies and amounts recognised in the financial statements. [IAS 8.28]

6. For the purpose of this edition, it is assumed that RePort Co. PLC did not have to make any changes to its accounting policies, as it is not affected by the interest rate benchmark reforms, and the other amendments summarised in Appendix D are only clarifications that did not require any changes. However, this assumption will not necessarily apply to all entities. Where there has been a change in policy, this will need to be explained, see note 26 for further information.

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Disclosure equity

Disclosure equity

Get the requirements for properly disclosing equity as the owners’ balance of assets less liabilities to provide the users of your financial statements with useful financial data, in the common language prescribed in the world’s most widely used standards for financial reporting, the IFRS Standards.

First there is a section providing guidance on what the requirements are, followed by a comprehensive example, easy to tailor to the specific needs of your company.

Disclosure equity guidance

Share premium

IAS 1 requires disclosure of the par RePort of shares (if any), but does not prescribe a particular form of presentation for the share premium. RePorting Co. is disclosing the share premium in the notes. However, local company laws may have specific rules. For example, they may require separate presentation in the balance sheet. [IAS 1.79(a)]

Treasury shares

IAS 32 states that treasury shares must be deducted from equity and that no gain or loss shall be recognised on the Disclosure equitypurchase, sale, issue or cancellation of such shares. However, the standard does not specify where in equity the treasury shares should be presented. RePorting Co. has elected to present the shares in ‘other equity’, but they may also be disclosed as a separate line item in the balance sheet, deducted from retained earnings or presented in a specific reserve. Depending on local company law, the company may have the right to resell the treasury shares. [IAS 32.33]

Other reserves

An entity shall present, either in the statement of changes in equity or in the notes, for each accumulated balance of each class of other comprehensive income a reconciliation between the carrying amount at the beginning and the end of the period, separately disclosing each item of other comprehensive income and transactions with owners. See also commentary paragraphs 2 and 3 to the statement of changes in equity. [IAS 1.106(d)]

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The Statement of Cash Flows

Statement of Cash Flows

IAS 7.10 requires an entity to analyse its cash inflows and outflows into three categories:

  • Operating;
  • Investing; and
  • Financing.

IAS 7.6 defines these as follows:

Operating activities are the principal revenue producing activities of the entity and other activities that are not investing or financing activities.’

Investing activities are the acquisition and disposal of long-term assets and other investments not included in cash equivalents.’

Financing activities are activities that result in changes in the size and composition of the contributed equity and borrowings of the entity.’

1. Operating activities

It is often assumed that this category includes only those cash flows that arise from an entity’s principal revenue producing activities.

However, because cash flows arising from operating activities represents a residual category, which includes any cashStatement of cash flows flows that do not qualify to be recorded within either investing or financing activities, these can include cash flows that may initially not appear to be ‘operating’ in nature.

For example, the acquisition of land would typically be viewed as an investing activity, as land is a long-term asset. However, this classification is dependent on the nature of the entity’s operations and business practices. For example, an entity that acquires land regularly to develop residential housing to be sold would classify land acquisitions as an operating activity, as such cash flows relate to its principal revenue producing activities and therefore meet the definition of an operating cash flow.

2. Investing activities

An entity’s investing activities typically include the purchase and disposal of its intangible assets, property, plant and equipment, and interests in other entities that are not held for trading purposes. However, in an entity’s consolidated financial statements, cash flows from investing activities do not include those arising from changes in ownership interest of subsidiaries that do not result in a change in control, which are classified as arising from financing activities.

It should be noted that cash flows related to the sale of leased assets (when the entity is the lessor) may be classified as operating or investing activities depending on the specific facts and circumstances.

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Cash flows from discontinued operations IFRS 5 – 2 Detailed Examples

 Cash flows from discontinued operations – Detailed Examples

IAS 7 requires an entity to include all of its cash flows in the statement of cash flows, including those generated from both continuing and discontinued activities.

IFRS 5 Non-current Assets Held for Sale and Discontinued Operations requires an entity to disclose its net cash flows derived from operating, investing and financing activities in respect of discontinued operations. There are two ways in which this can be achieved:

===1) Presentation in the statement of cash flows

Net cash flows from each type of activity (operating, investing and financing) derived from discontinued operations are presented separately in the statement of cash flows.

===2) Presentation in a note

Cash flows from discontinued operations are included together with cash flows from continuing operations in each line Cash flows from discontinued operationsitem in the statement of cash flows. The net cash flows relating to each type of activity (operating, investing and financing) derived from discontinued operations are then disclosed separately in a note to the financial statements.

When a disposal group that meets the definition of a discontinued operation is classified as held for sale in the current period, and has not been realised/disposed of at the entity’s reporting date, the closing balance of cash and cash equivalents presented in the statement of cash flows will not reconcile to the cash and cash equivalents balances that are included in the statement of financial position at the reporting date.

This is because the cash and cash equivalents related to the disposal group are subsumed into the assets and liabilities of the disposal group and presented within the single line item in the statement of financial position.

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