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 the 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.