Does the new leases standard impact power purchase arrangements (PPAs)?
Under IFRIC 4 Determining whether an Arrangement contains a Lease (IFRIC 4), currently some PPAs are accounted for as leases. Consequently, it is necessary to assess whether the lease is a finance or operating lease where the power producer is the lessor, and the energy purchaser is the lessee.
The new leases standard (IFRS 16 Leases (IFRS 16)) has changed the accounting for lessees significantly because there is no longer a distinction between finance and operating leases for lessees. Lessees now have to recognise all leases on balance sheet. Therefore, it is critical to assess whether these arrangements would fall into the scope of IFRS 16.
The new lease definition appears similar to the requirements of IFRIC 4, except that it also requires an entity to have the ‘right to direct the use of the asset’.
IFRIC 4 only requires the customer to have a right to use the specific asset, not to direct the use of the asset as well. This additional requirement may result in fewer PPA’s meeting the definition of a lease and therefore not within the scope of IFRS 16. As a result, it is critical that each agreement is assessed in detail.
- There is a practical expedient available for the application of the lease definition on transition. The entity can either apply the new lease definition to all contracts or apply the practical expedient and only apply the new lease definition to new or changed contracts.
- The impact of other leases (other than for the supply of energy) could be significant. Some examples include a lease of land to construct the power plant on or the lease of other assets used in the production of energy.
IFRS 16 is effective for annual reporting periods beginning on or after 1 January 2019.
Have you done your assessment?
If you have any questions related to the impact of IFRS 16, please contact KPMG’s Reporting, Accounting and Assurance Services department (Technical Accounting).
Lise du Randt
Associate Director: Reporting Accounting and Assurance Solutions
Madeli Jansen van Rensburg
Senior Manager: Reporting Accounting and Assurance Solutions
Manager: Reporting Accounting and Assurance Solutions