IFRS For Power Sector

Mastering the challenge
Practical IFRS guidance for power and utilities
Content
Introduction A Wholesale fuel sourcing and sales

1 Fuel purchase and sales contracts 1.1 Scope of IAS 39 1.2 Embedded derivatives in commodity purchase contracts 1.3 Day-1 profit long-term fuel purchase contracts measured at fair value
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5 5 10 11
Generation
1 Generation property, plant and equipment 1.1 Components approach and annual review of depreciation inputs 1.2 Liquidated damages Decommissioning provisions 2.1 Recognising and measuring a decommissioning provision 2.2 Changes in an existing provision 2.3 Investment in external decommissioning funds Treatment of nuclear fuel elements and related provision for disposal Emission rights under a cap and trade scheme and similar schemes 4.1 Emission rights under a cap and trade scheme 4.2 Certified emissions reductions 4.3. Green or renewable certificates Arrangements containing a lease 5.1 Specific asset or assets 5.2 Portions of assets 5.3 A right to use the item 5.4 Other considerations Other contracts 6.1 Tolling contracts 6.2 Compulsory yield of power Power station reoptimisation
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12 12 12 12 12 13 13 14 14 14 16 17 18 19 19 19 19 20 20 20 20
2 3 4 5 6 7
Transmission and distribution

1 2 3 4 5 6 Property, plant and equipment transmission and distribution networks Impairment of power stations and grids 2.1 Indicators of impairment 2.2 Determining the cash generating unit (CGU) for power stations Gas in a distribution network or storage Rate regulated activities 4.1 Scope of proposals 4.1 Recognition and measurement Service concession arrangements 5.1 Scope 5.2 Accounting treatment Arrangements that may contain a lease - transmission contracts and capacity contracts
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21 22 22 23 23 23 23 24 25 25 25 26
Mastering the challenge: Practical IFRS guidance for power and utilities
Retail customers
1 2 3 Connection fees and transfers of assets from customers 1.1 Connection fees and costs 1.2 Transfers of assets from customers Customer acquisition costs Application of IAS 39 to retail customer contracts
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27 27 27 28 28
Support functions and risk management

1 2 3 4 5 Risk management 1.1 Market risk disclousures non-financial items Revenue presentation gross or net? Commodity hedge accounting Emission rights and CER swaps 4.1 Scope of IAS 39 4.2 Receipt of cash swap is not within the scope of IAS 39 4.3 If the swap is within the scope of IAS 39: 4.4 Determining fair value 4.5 Impact on net liability method Weather derivatives
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29 29 30 31 32 32 32 32 32 32 32
Business combinations
1 2 Emission rights acquired in a business combination Reassessment of embedded derivatives 2.1 Reassessment of embedded derivatives - general 2.2 Reassessment of embedded derivatives in a business combination
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33 33 33 33
Contacts
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Introduction
To assist financial managers and executives Many power and utility entities either in making these judgements, Ernst & report under International Financial Reporting Standards (IFRS), or they report Youngs Global Power and Utilities Centre is in a jurisdiction which is in the process of or pleased to provide you with Mastering the challenge practical IFRS guidance for planning to convert to IFRS. IFRS requires power and utilities. We have analysed the extensive judgement to be applied in the issues by the way in which you organise selection and application of accounting your business: treatments. This can be challenging because IFRS does not deal with many Wholesale fuel sourcing and sales aspects of financial reporting that are Generation specific to the power and utilities industry.
Transmission and distribution Retail customers Support functions and risk management Business combinations In this publication, we focus on industry specific issues. For further information about general financial reporting issues, refer to our annual International GAAP publication.
A Wholesale fuel sourcing and sales
A.1 Fuel purchase and sales contracts

A.1.1 Scope of IAS 39
Power and utility entities often enter into long-term commodity purchase contracts to meet contractual obligations to supply their customers. They may also enter into long-term sales contracts with major customers or with other power and utility entities, for example, to secure a certain volume of sales. Generally, such contracts are entered into for the purpose of the receipt or sale of a commodity (e.g., oil, gas, coal and/or power) in accordance with an entitys own use requirements. Depending on the terms of the contract, these may be outside the scope of IAS 39 Financial Instruments: Recognition and Measurement, or they may be accounted for off balance sheet. The International Accounting Standards Board (IASB or the Board) believes that a commodity contract that can be net settled and is not entered into for the purpose of the purchase or sale of a commodity in accordance with an entitys expected purchase, sale or usage requirements (own use), should be accounted for as if it is a financial instrument. For power and utility entities the non-financial item is usually a commodity. We refer to contracts for power and utility generally as commodity contracts in this section. Commodity contracts that are within the scope of IAS 39 are considered to be derivatives. Consequently, they are
measured at fair value through profit or loss which creates volatility in the income statement. This income statement volatility can be difficult to explain as these contracts are often used to purchase or sell commodities in transactions that entities consider part of their normal business activities. In this section we discuss: The various ways in which a contract can be net settled If net settlement is possible per IAS 39, when the own use exemption can be applied Other issues to consider. A.1.1.1 Net settlement: general requirements If a commodity contract can be settled net either in cash or another financial instrument, or by exchange of financial instruments, it must be accounted for as a financial instrument within the scope of IAS 39. IAS 39 describes various situations in which a contract can be considered to be net settled. A contract can be net settled if: The terms of the contract permit either party to settle it net in cash or another financial instrument, or by exchanging financial instruments There is a practice of settling similar contracts net in cash or another financial instrument, or by exchanging financial instruments (whether with the
counterparty, by entering into an offsetting contract or by selling the contract before its exercise or lapse) For similar contracts, the entity has a practice of taking delivery of the underlying commodity and selling it within a short period for the purpose of generating a profit from short-term price fluctuations or broker-dealers margin, for similar contracts The commodity is readily convertible to cash There is a written option to buy or sell a non-financial item that can be settled net in cash or another financial instrument, or by exchanging financial instruments IAS 39 deems that contracts that are net settled in accordance with these provisions do not qualify for own use as they are not entered into for the purpose of the receipt or delivery of the commodity in accordance with the entitys expected purchase, sale or usage requirements. They are automatically within the scope of IAS 39. Note that neither similar contracts nor practice are defined by the standard and are discussed further below. The flow chart in Box 1 illustrates the various examples of net settlement described above and how they interact with own use. In this section we describe each step in the flow chart. Embedded derivatives are considered in section A.1.2.
Box 1: Flow-chart to determine whether a contract to buy or sell a non-financial item falls within the scope of IAS 39
Is the contract required to be net settled? No IAS 39 para 6 (b) or 6 (c)? For similar contracts, the entity has a practice of: 6 (b) Net settling; or 6 (c) Taking delivery and selling to generate profit from short-term price fluctuations or dealers margin No IAS 39 para 6 (a) or 6 (d)? Non IAS 39 No 6 (a) Is it explicit in the terms of the contract that any party can settle; or 6 (d) The non financial item is readily convertible to cash Yes Written option No Non IAS 39 Yes "Own Use" exemption
Yes
IAS 39
Yes
IAS 39
commodity contract offsets the original contract. There is no definition of offsetting in the context of this paragraph. It can be interpreted as matching the position of a contract with equal and opposite movements in risk, for the purpose of limiting or eliminating risk. A contract is offset if the new contract offsets all risks, other than credit risk. See below for further discussions of indicators of whether a contract is net settled according to IAS 39.6(b) or (c). IAS 39.6(c) A contract is net settled per IAS 39.6(c) if the entity has a practice of taking delivery of the underlying commodity and selling it within a short period after its delivery to generate profit from short-term price fluctuations or a dealers margin. Power and utility entities must carefully assess contracts to determine whether they are taking delivery of an underlying commodity for a short period to then sell it to obtain profit from short-term price fluctuations or a dealers margin. For example, this may occur if a power and utility entity has signed a fixed price long-term purchase contract at a price lower than the current spot market price. To take advantage of this low price they purchase volumes in excess of their physical requirements to sell directly to the wholesale market for profit. Similar contracts and past practice In the context of IAS 39.6(b) or (c), we believe that similar should be interpreted with reference to the purpose of the commodity contract within the power and utility entitys business. Therefore, contracts with identical form may be considered dissimilar due to their intended use (e.g., physical supply vs. proprietary trading). The intention of a contract should be documented at its inception. However, an entity should be able to demonstrate that it has appropriate processes and controls in place to adequately segregate contracts with different intentions. The standard contains no further guidance on what degree of past practice of net settlement prevents an entity from treating similar contracts as own use. We do not
Yes
IAS 39
No
IAS 39
Consider embedded derivatives
Is the contract required to be net settled? The first step is to determine whether the contract is required to be net settled in cash or another financial instrument, or by exchanging financial instruments. If so, it is automatically within the scope of IAS 39 it cannot be entered into for own use. For example, an entity purchases coal under floating price contracts. To avoid exposure to the market price, they enter into a swap to fix the price of coal. The swap has a clause that states that settlement will occur through receipt or payment of the difference between the agreed fixed price and a specified coal index at maturity date and that no coal will be delivered or received. IAS 39 paragraphs 6(b) or 6(c)? If it is not certain that the contract will be net settled, net settlement in accordance with IAS 39.6(b) or (c) should be considered next. A commodity contract is
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automatically within the scope of IAS 39 if it is similar to other contracts with a practice of net settlement. The terms similar and practice are not defined. Therefore, applying these paragraphs requires the application of judgment. Below, we discuss the requirements of IAS 39.6(b) or (c). In addition, we consider how we believe similar should be interpreted; the difficulty of determining practice and some indicators that we believe can be applied when determining whether a contract is similar. IAS 39.6(b) A commodity contract is scoped within IAS 39 if there is a past practice of settling similar contracts net in cash or another financial instrument, or by exchanging financial instruments. An example of cash net settlement was provided above. However, a commodity contract is often net settled by another financial instrument (commodity contract). The other
believe that any net settlement automatically taints an entitys ability to apply own use, for example, where an entity is required to close out (or offset) a number of contracts or sell amounts purchased directly to the market as a result of an unexpected major disruption arising from external events at a production facility. However, judgment will always need to be applied based on the facts and circumstances of each case.
Indicators for being in the scope of IAS 39.6(b) or (c) Individual facts and circumstances must be examined to determine whether a contract is similar to other net settled contracts. Box 2 contains some of the factors to consider in making this assessment. This is not an exhaustive list and the weight applied to each factor requires judgment and, in many situations, mixed factors may be present. Consideration of an entitys control
environment may be warranted where seemingly similar contracts are entered into for different purposes. Contracts entered into by a commodity broker-trader who measures its inventories at fair value less costs to sell in accordance with IAS 2 Inventories are considered to be net settled. However, determining whether other, similar, activities are within the scope of IAS 39 requires judgment.
Box 2: Indicators of being in the scope of IAS 39.6(b) or (c) Factor Indicator of trading activities Indicator of transactions in accordance with expected purchase, sale or usage requirements Generation of a profit margin by creating a market between normal buyers and sellers of a commodity, by entering into back-to-back sales and purchase contracts with a stable customer base, at a relatively consistent spread, such that the current spot or future price is less relevant. Trades are usually with a stable customer base who are normally producers or users within the value chain (refer to the value chain indicator below). Business is managed based on a planned production or sale process and customer supply and demand, and is measured based on gross margin. Remuneration is unlikely to include significant bonuses based on mark to market profits of the contracts. The entity enters into purchase and sales contracts with producers and users of the commodity creating links within the value chain for the commodity. This may include repackaging, but it is not necessary to repackage the commodity to be eligible for the expected purchase, sale or usage expectation. Contracts are always settled by physical delivery.
How the entity intends to profit from the contract
The entity seeks to profit from short-term price fluctuations or by making a margin between the bid and ask prices. This may involve taking price exposure and actively monitoring movements in price and closing out positions to capture more profit from such movements. Counterparties vary based on market conditions as, typically, the entity or the customer initiates the trade due to market opportunity. Business is managed based on a mark to market profit reflecting the fair value changes of contracts. Remuneration includes a significant bonus component, based on mark to market profits of the contracts. Sales and purchases contracts made with counterparties that also trade and/or are not end users of the commodity themselves may indicate that the entity intends to profit from trading rather than from creating links between various counterparties in the commodity value chain. Contracts are regularly settled net, for example, by entering into offsetting contracts with the same counterparty and physically delivering the net difference between the contracts (note that this would automatically bring such contracts into the scope of IAS 39).
Customer base/contract counterparty
How an entity manages its business
How staff are remunerated
Whether value is added by linking parties in the value chain.
Settlement of the contracts
IAS 39 paragraphs 6(a) or 6(d)? Net settlement in accordance with IAS 39.6(a) or (d) must be considered if the commodity contract is neither net settled with certainty nor is net settled per IAS 39.6(b) or (c). Paragraph 6(a) explicit net settlement terms If there is an explicit net settlement term in a commodity contract, then it must be assessed to determine whether it is for own use and, therefore, not within scope (refer below). It can be difficult to identify when a net settlement term exists. For example, in commodity contracts a non-performance clause may be a net settlement term. It is common for commodity contracts to have penalty clauses relating to non-delivery or incomplete delivery (by the seller) and non-acceptance of all or part of the delivery (by the buyer) of contracted quantities. Penalties may be a fixed sum or another form of payment to ensure that the nondefaulting party is not disadvantaged. Generally, such clauses do not constitute net settlement in accordance with IAS 39.5. However, we consider that a symmetrical variable default clause is an example of a net settlement in cash clause per IAS 39.5. A default clause is symmetrical and variable if the normal contractual price per unit of commodity is fixed and any penalty payment is made for quantities not taken in both of the following circumstances, if the buyer defaults: The buyer must pay the seller the difference between the fixed contract price and prevailing market price, if market price is lower than the contract price The seller must pay the buyer the difference between the fixed contract price and prevailing market price, if market price is higher than the contract price. A default clause is only symmetrical and variable if both the buyer and seller must make a payment as described above. See Example 1.
Example 1 Symmetrical default clause

Entity A sells electricity to Entity B for 30 CU per MWh, and includes a minimum of 10,000 MWh. For each MWh that Entity B does not take, entity B: Must pay Entity A the difference between 30 CU and prevailing market price, if market price is lower than 30 CU Receives the difference between 30 CU and prevailing market price, if market price is higher than 30 CU. In both February and March, Entity B did not take delivery of 100MWh. In February, the market price was 33 CU and in March it was 29 CU. The resulting payments were: In February, Entity B received 300 CU ((33 CU 30 CU) x 100 MWh) from Entity A In March, Entity B paid 100 CU ((29 CU 30 CU) x 100 MWh) to Entity A
A symmetrical variable penalty clause requires the defaulting party to compensate for losses suffered. However, it also provides the defaulting party with the right to receive any gain its counterparty realises as a consequence of its own default. In this case the seller is effectively acting as the buyers broker. For example, if the buyer takes less than the required quantity as per the contract, the seller is effectively selling it on the market on the buyers behalf. This is net settlement because it is effectively the same as the buyer taking the minimum quantity and selling the quantity that is not required on the wholesale market. Symmetrical variable penalty clauses are often used by counterparties that enter into the commodity contract for speculative purposes. Although such a symmetrical variable penalty clause is a net settlement clause, the contract may still be outside the scope of IAS 39 if the clause is not exercised and the contract qualifies for the own use exemption. Paragraph 6(d) Commodity is readily convertible to cash If a commodity is readily convertible to cash it is within the scope of IAS 39, unless the contract is for own use. The term readily convertible to cash is not defined further in IAS 39. We consider that a commodity is probably readily convertible to cash if: its units are largely fungible; there is an active market with readily available quoted spot
prices; and the market can absorb the quantity held by the entity without significantly affecting the market price. Such an assessment requires judgment. Factors to consider also include the nonfinancial items quality, location or other characteristics such as size or weight. For example, when considering location, a particular item may be readily convertible to cash in one location but not in another. A significant effort to sell the non-financial item (often because of transportation needs) may indicate that it is not readily convertible to cash. Written option The next issue to consider is whether the contract is or contains a written option if the contract is not net settled in any other manner. A written option to buy or sell a non-financial item is automatically within the scope of IAS 39 if it can be settled net, according to the terms of the contract, or where the underlying non-financial item is readily convertible to cash (refer to the discussion about IAS 39.6(a) and (d) above). Written options in commodity contracts arise where a seller has given the buyer some volumetric flexibility over the contractual volumes. Therefore, the buyer can nominate how much they will buy in a given period, usually within a specified range. Consequently, commodity contracts must be analysed to determine whether the volumetric flexibility given by the seller
constitutes a written option from the sellers perspective. Flexibility from the purchasers point of view is not a written option - it is a purchased option. Many commodity contracts contain volumetric flexibility. There are two main types of contracts with volumetric flexibility: some wholesale contracts and most end-user customer contracts. Wholesale contracts with volumetric flexibility assist purchasers as they can alter the volume purchased in the event of changes in demand or consumption. Wholesale contracts and contracts with large end-user customers (e.g., factories) often stipulate a minimum take-or-pay volume and some volumetric flexibility. However, small end-users (e.g., households) generally have full volumetric flexibility. Therefore, different commodity contracts must be analysed based on facts and circumstances to determine whether volumetric flexibility constitutes a written option, in accordance with IAS 39, from the sellers perspective. In March 2007, the International Financial Reporting Interpretations Committee (IFRIC) considered what is meant by a written option within the context of IAS 39.7. The focus of its consideration was accounting for energy supply contracts to retail customers. It did not add this item to its agenda as it expected little divergence in practice. However, it noted that such retail contracts are not capable of net cash settlement in accordance with IAS 39.5 and IAS 39.6. Retail energy contracts, with volume flexibility to meet the purchasers variable usage requirements, are not written options, when: The non-financial item is essential to the customer The purchaser does not have access to a market where the non-financial item can be resold and, therefore, cannot be net cash settled The purchaser cannot easily store the non-financial item in significant amounts; and The supplier is the sole provider of the non-financial item
Example 2 Written option in a wholesale gas sales contract

Entity A sells Entity B gas under a fixed price contract for six months. Entity B must purchase a minimum of 80,000 therms a day, but has the ability to purchase up to 100,000 therms a day. Entity B has a direct connection to the gas network and can buy and sell directly from/to the wholesale market. Entity B primarily entered into the contract to purchase the gas to burn in its gas-fired power station to generate electricity. However, the volumes are in excess of Entity Bs needs in some months. When this occurs, and the market price is higher than the contract price, Entity B will take delivery of the excess gas and sell it onto the market to make a profit from shortterm price fluctuations. Therefore, the contract is a written option from Entity As perspective. Entity A can choose to either fair value the full contract or just the written option component (the 20,000 therms per day), assuming that the contract is not net settled in any other manner. The accounting policy chosen by Entity A must be applied consistently to all written option contracts.
In such cases, the customer will only take the volume it requires to meet its needs and has no practical ability to sell any excess amount to take advantage of any price differential between the contract and market price. This may be the case for a residential customer. However, some commodity contracts may meet the definition of a written option within the scope of IAS 39, if the purchaser has the ability to sell variable volumes purchased to the wholesale market for the purposes of making arbitrage profits. Such purchases would be made for arbitrage profit-making rather than to be used by the entity. This is more likely to be the case for a wholesale contract or some large end-user customers. To make that assessment, an entity would need to understand its customers business which can prove difficult in practice. See Example 2. If the volumetric flexibility does represent a written option, the own use exemption cannot be applied and the contract will be within the scope of IAS 39. An entity can choose to either fair value an entire contract containing a written option, or separately value the written option, if possible. The chosen accounting policy must be applied consistently. Note that the valuation of a contract with volumetric flexibility is likely to be complex. Further to the rejection notice issued in March 2007, the IFRIC began to discuss if
volumetric flexibility should be bifurcated from the host contract in November 2009. As of the time of writing, no decision has been made by the IFRIC. The final decision will have a sigificant impact on how power and utility entities account for written options, and potentially other contracts. Own use exemption The final step in the decision tree is to establish whether a contract can be net settled in accordance with paragraph 6(a) or 6(d) of IAS 39 and is not a written option, an entity should consider whether the own use exemption applies. A commodity contract is entered into for a power and utilities entitys own use if the purpose of the receipt or delivery of the commodity is in accordance with the entitys expected purchase, sale or usage requirements. There is no further guidance in the standard to interpret the meaning of own use. However, we believe that applying the indicators of being in the scope of IAS 39.6(b) or (c), as described above, will help entities make this assessment. For a contract to be accounted for as own use until maturity it must (a) have been entered into and (b) continue to be held for own use. Consequently, an own use contract can fall within the scope of IAS 39 after its inception. However, a contract within scope of IAS 39 can never be classified as own use.
A.1.1.2 Balance sheet classification of derivatives: current vs. non-current All recognised commodity derivative contracts must be presented on the balance sheet. The classification of these assets and liabilities has always been an issue for preparers of financial statements. An amendment was made to IAS 1 Presentation of Financial Statements to clarify that all derivatives should be classified as current or non-current on the basis of their settlement dates (paragraph BC 38C of IAS 1). This clarified that derivatives (not designated as a hedging instrument in an effective hedge) classified as held-for-trading need not be presented as current. IAS 1 only requires that assets and liabilities be classified as current if they are held primarily for the purpose of being traded. Some entities had previously interpreted this to mean that any derivative must be classified as current. The amendment does not address how to split the carrying amount of derivatives with staggered settlement dates into current and non-current components. Consequently, entities will need to apply judgment when determining an appropriate split. A.1.1.3 Commodity contract entered into partly for expected purchase requirements
market do not exceed the volume designated as a financial instrument. If this occurs, the entire contract may need to be treated as a financial instrument from that point onwards. It may also call into question whether other contracts split between own use and financial instrument components can continue to be split in this way. Therefore, where demand can fluctuate compared to expectations, it is advisable to allow some head-room and designate a lower volume as own use.
they meet the criteria in IAS 39.11. The key criterion impacting power and utility entities is whether an embedded derivative is closely related or not to its host contract. If an embedded derivative is not closely related to its host contract it must be: Separated from its host contract; and Accounted for separately as a standalone derivative, measured at fair value (except where the entire contract is measured at fair value through profit or loss) An embedded derivative is not closely related if its economic characteristics and risks are not closely related to the economic characteristics and risks of its host contract. IAS 39 does not define closely related. Instead, it provides a series of examples when an embedded derivative is or is not closely related to its host contract (IAS 39 AG 27 AG 33). Making this determination for commodity contracts requires judgment. We discuss two power and utility industry-specific considerations below. The reassessment of embedded derivatives is addressed in section F.2. A.1.2.1 Inputs, ingredients, substitutes and other proxy pricing mechanisms It is common for the pricing of commodity contracts to be determined by reference to the price of inputs into, ingredients used to generate, or substitutes for, the nonfinancial item. This is common when the commodity in the host contract is not quoted in an active market. In such cases, prices in commodity contracts are usually linked to another commodity which could be considered a substitute for the underlying commodity. For example, the price of a gas contract may be linked to an oil index. Alternatively, the price may be linked to an input or ingredient. For example, an electricity contract may be linked to the price of coal or gas as these
A.1.2 Embedded derivatives in commodity purchase contracts

Identifying and accounting for embedded derivatives is challenging. This section highlights the key areas where issues may arise for power and utility entities. For a comprehensive discussion of embedded derivatives refer to International GAAP. Long-term commodity purchase contracts may contain contractual terms such as: Pricing clauses based on indices (e.g., inflation, etc) or the prices of other commodities (for example oil, gas or power) Currency denominations that are different from the functional currencies of the contracting parties involved
These are examples of embedded derivatives. An embedded derivative is a An entity may enter into a contract that is component of an instrument that also partly for the entitys own use, but the includes a non-derivative host contract contractual volumes exceed expected usage (IAS 39.10). The embedded derivative requirements. An entity can split this causes some of the cash flows of the contract into two components: the volumes combined instrument to vary in a similar for own use can be accounted for as such way to a stand-alone derivative. Some or all and the volumes exceeding expected usage of the cash flows required by the contract requirements as being within the scope of would be modified according to a specified IAS 39. This split must be based on commodity price, foreign exchange rate, volumes, not time. index of prices or rates, or other underlying variable. Any such designation should be made at the inception of the contract and the entity Embedded derivatives must be separated should ensure that the volumes sold to the from their non-derivative host contracts if
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commodities are commonly used in power stations to generate electricity. There is no specific guidance to determine whether such features are closely related to their host contracts. Therefore, we believe that such embedded derivatives are closely related to their host only when, at the time that the contract was entered into: The mechanism is not significantly leveraged; and The pricing feature was used because: The market for the underlying physical commodity was not active; and The pricing mechanism specified in the contract was commonly used for the commodity concerned. A pricing mechanism based on inputs and ingredients is not leveraged if the percentage of the price driven by the input or ingredient is directly proportional to the proportion required for use, e.g., in production. It is a matter of judgment to determine whether a market is active or not. This can become more difficult if a market increases in activity over time. Such an embedded derivative is not closely related if there is an active market for the underlying commodity, as there is no need for an alternative pricing mechanism. The use of such a pricing mechanism is a strong indication that the entity has entered into a speculative position and we would not normally consider such features to be closely related to the host. A.1.2.2 Floors and caps Floors and caps should also be considered to determine whether they are closely related to their host contract. Provisions that establish a cap and a floor on the price to be paid or received for the commodity are closely related to the host contract if both the cap and floor were out of the money at inception and are not leveraged. The reassessment of embedded derivatives is addressed in section F.2.
A.1.3 Day-1 profit long-term fuel purchase contracts measured at fair value
A commodity contract that is within the scope of IAS 39, is measured at fair value through profit or loss. If an instrument is quoted in an active market and the entity has immediate access to another more favourable active market in the same instrument, the instruments initial fair value is determined by reference to the more advantageous market (adjusted for any differences between the instruments, e.g., credit risk). The use of the more advantageous price may give rise to a gain, which is known as a day one profit. An entity must however consider whether it has immediate access to a more favourable market if some effort is required to transport the commodity to that other market. If the term of the contract extends beyond the liquid period for the underlying commodity, (period for which there are quoted prices in an active market) or if there is no active market for the commodity it is likely that a model will be used to determine its fair value. For such contracts, the initial fair value should be determined using a valuation technique, using the transaction price as a starting point. An immediate profit resulting from the difference between the valuation and the transaction price can only be recognised if the valuation is supported by prices of other transactions in the same instrument or a valuation technique is used in which all inputs are from observable markets. The active market for long-term fuel purchase contracts often extends for a shorter period than the maturity of a contract. As a result, the criteria for recognition of the day one profit (or loss) will often not be met and no day one profit will be recognised upon initial recognition of the contract. If an immediate or day one
profit cannot be recognised it must be deferred. Any day one profit can only subsequently be recognised to the extent that it arises from a change in a factor, including time, which a market participant would consider when setting a price. Due to a lack of clear guidance about the treatment of the release of a day one gain in the standard, there is mixed practice in the industry. One possible view is that, at inception, an entity re-calibrates its model such that the fair value of the model reflects the transaction price (usually nil). This can be done by altering the market prices in the illiquid part of the model to force a nil gain or loss. The entity would then subsequently update its model to take into account price movements in the various periods as follows: During the liquid period (quoted market prices are available): update the model for all price movements and recognise resulting gains and losses During the semi-liquid period (some limited quoted prices are available): update prices based on reasonable market information and recognise resulting gains and losses. For example, in this period only seasonal prices may be quoted. An entity may shape these prices to take account of more granular seasonality, for example, to determine monthly prices within the relevant season During the illiquid period (no quoted prices are available): only update prices where there is a fundamental change in market participants expectations (for example, a generally accepted change in the long-term view of prices)
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B Generation
B.1 Generation property, plant and equipment

Accounting for property, plant and equipment (PP&E) is an important issue for power and utility entities as most are capital intensive. We discuss two key industry issues: the components approach and the impact of liquidated damages. Rate regulated activities, impairment and renewals accounting is considered in section C.
B.1.1 Components approach and annual review of depreciation inputs

IAS 16 Property, Plant and Equipment requires that significant parts of an asset must be depreciated separately. Significant parts have a cost which is significant relative to the total cost of the asset. In addition, IAS 16 requires that an entity derecognises an existing part if it is replaced (whether it has been separately depreciated or not). The carrying value of the part that has been replaced can be estimated using the cost of the replacement as an indicator of its original cost, if necessary. Parts are undefined. This is commonly known as the components approach.
To apply the components approach appropriately, an in-depth analysis is required to identify the significant components that make up plant or a grid/ network (grids/networks are considered separately in section C). Applying the components approach to a power and utility entity requires technical knowledge that may necessitate the involvement of engineers and other operations staff. Factors to be considered are technical design, long-term maintenance and replacement plans and split of the asset for operational purposes, etc.
B.2 Decommissioning provisions

Many power and utility entities have obligations to dismantle or remove items of PP&E or to restore a site to certain minimum standards at the end of an assets life (for example, a nuclear power plant). These obligations are often referred to as decommissioning and restoration liabilities or asset retirement obligations (or AROs). These obligations are accounted for under: IAS 16 Property, Plant and Equipment IAS 37 Provisions, Contingent Liabilities and Contingent Assets IFRIC 1 Changes in Existing Decommissioning, Restoration and Similar Liabilities IFRIC 5 Rights to Interests arising from Decommissioning, Restoration, and Environmental Rehabilitation Funds In this section, we discuss associated industry issues: when a provision should be recognised and how to measure it; the impact of changes on a provision; accounting for external waste funds; and nuclear fuel elements and their disposal.
B.1.2 Liquidated damages

An entity may receive compensation (liquidated damages) as a result of delays by sub contractors. This would occur where a power and utility entity has contracted another entity to build its PP&E such as power plants and turbines. Normally, IAS 16 requires that these damages received are set off against the project cost. However, we believe that liquidated damages received should be recognised as income if the construction contract specifies that liquidated damages will be payable as compensation for loss of revenue arising from contract delays, and the basis of calculation is clearly related to income lost.
B.2.1 Recognising and measuring a decommissioning provision

As soon as an obligation to decommission construction activities exists, IAS 37 requires that a liability be recognised. This would occur when the PP&E is constructed and is ready to be used. The total decommissioning cost is estimated and discounted to its present value. IAS 16 requires that this amount is added to the relevant PP&Es cost. The provision that constitutes part of the cost of the PP&E, excludes any provision for decommissioning which is recognised as a result of producing inventory. In subsequent periods, the PP&E (including the initial estimated
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decommissioning cost) is depreciated over its useful life. The discounted provision is unwound through the income statement as a finance cost.
PP&E is measured using the revaluation model. As this is model is not commonly applied in the power and utility industry, it is not addressed in this publication.
B.2.3.1 Accounting for an interest in a fund by a contributor A contributor must recognise its obligation to pay decommissioning costs as a liability and its interest in the fund separately, unless the contributor is not liable for decommissioning costs if the fund fails to pay (IFRIC 5, paragraph 7). If a contributor has control, joint control or significant influence over the fund as defined in IAS 27 Consolidated and Separate Financial Statements, IAS 28 Investments in Associates, IAS 31 Interests in Joint Ventures or SIC 12 Consolidation Special Purpose Entities, it should account for its interest in the fund in accordance with the relevant standard (IFRIC 5, paragraph 8). If the fund does not fall within the scope of any of these standards, the contributor should recognise the right to receive reimbursement from the fund as a reimbursement right under IAS 37. The reimbursement right is capped at the lower of the amount of the decommissioning obligation or the contributors attributable share of the fair value of the net assets of the fund (IFRIC 5, paragraph 9). B.2.3.2 Accounting for obligations for additional contributions A contributor may incur an obligation to make potential additional contributions. For example, in the event of bankruptcy of another contributor, or if the value of the investment assets held by the fund decreases to the extent that they are insufficient to fulfil the funds reimbursement obligations. Such obligations are accounted for as contingent liabilities within the scope of IAS 37 (IFRIC 5, paragraph 10).
B.2.2 Changes in an existing provision

There is no guidance in IAS 37 to determine how subsequent changes in the best estimate of the decommissioning obligation are reflected in the provision. Nor is there guidance in IAS 16 to determine the impact of changes in the estimate of the decommissioning obligation. IFRIC 1 was developed to provide this guidance. The provision increases as time passes due to the unwinding of the discount. IFRIC 1 states that this must be recognised in the income statement as a finance cost as it occurs. The finance cost is not a borrowing cost as defined in IAS 23 Borrowing Costs. Therefore, it cannot be capitalised under IAS 23. The interpretation also deals with the following changes in estimates, which result in adjustments to the provision and may be recognised in the carrying amount of the relevant item of PP&E: A change in the estimated outflows to settle the obligation; or A change in the current market-based discount rate. If the historical cost method is used to record PP&E, these changes in the liability result in a change in the carrying value of the PP&E. An increase in the carrying value would require entities to consider whether the revised carrying amount needs to be tested for impairment. A decrease in the carrying value of the PP&E can only reduce the carrying value to nil. Any excess is recognised in the income statement. We have only discussed the impact of changes in provisions when the PP&E is measured at historical cost. Different rules apply if the
B.2.3 Investment in external decommissioning funds

In some countries, power and utility entities contribute to a separate fund established to meet decommissioning obligations to be incurred in the future. Such funds are typically set up in the nuclear industry and may take various forms. They may be set up to meet the costs of a single operator or a group of operators. Funds may be organised to cover the entire nuclear industry in one country. Generally, the funds are administered by independent trustees. The obligated entities contribute funds, which are invested by the trustees. Although the funds are created to meet decommission costs, the contributors to the fund would normally retain the obligation to pay the decommissioning costs. IFRIC 5 applies to a contributor who has interests in decommissioning funds, where: The funds assets are administered separately, either in a separate legal entity or as segregated assets in another entity; and The contributors right to access the assets is restricted. Note that a residual interest in a fund (beyond reimbursement), such as a right to distribution after all decommissioning has been completed, is not within the scope of IFRIC 5 and may be an equity instrument within the scope of IAS 39. IFRIC 5 addresses: How a contributor should account for its interest in a fund; and How a contributors obligation to make additional contributions should be accounted for.
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B.3 Treatment of nuclear fuel elements and related provision for disposal
Nuclear fuel elements can be considered as items of PP&E as they are held for use in the production of electricity. However, nuclear fuel elements could also meet the definition of inventories per IAS 2 as they are consumed in the production process. Consequently, we believe that classification as inventories is also acceptable. If nuclear fuel elements are treated as PP&E, the decommissioning and disposal costs are recognised as part of the cost of PP&E in accordance with IAS 16 and as a liability in accordance with IAS 37. Effects of subsequent events which change the measurement of the liability are accounted for under IFRIC 1 (refer to section B.2 above). If nuclear fuel elements are treated as inventory, the same accounting treatment, with regard to the decommissioning and disposal costs, is applied as in the case of items of PP&E.
to a target level of emissions (a cap) and allow trading of the emissions. These are generally issued for specified compliance periods which last a certain number of years. In December 2004 the IFRIC issued IFRIC 3 Emission Rights. However, that was subsequently withdrawn. At the time of writing, there is no issued guidance from the IASB dealing with accounting for emission rights. However, there is an active project on the Boards agenda Emissions Trading Schemes. Until the IASB issues definitive guidance power and utility entities need to select an accounting policy. Possible policies are discussed in further detail below. B.4.1.1 IFRIC 3 (now withdrawn) IFRIC 3 applies to entities currently participating in a cap and trade scheme. It requires that emission rights either bought by or granted to the entity are accounted for as intangible assets under IAS 38 Intangible Assets. They are initially measured at fair value. In the case of granted allowances, any difference between the amount an entity paid for the right (generally nil) and its fair value is accounted for under IAS 20 Accounting for Government Grants and Disclosure of Government Assistance. The amount is recognised as deferred income on the balance sheet and is recognised in income over the period the emissions are made (the compliance period), regardless of whether allowances are held or sold. Under IAS 38, the entity has the option to measure the allowances at cost (fair value at grant date) or at fair value. The latter is only allowed when there is an active market. Under the fair value option, any re-measurement to fair value will be accounted for as a revaluation through other comprehensive income. As emissions are made a liability is recognised. This liability is measured as the best estimate to settle the present obligation at the balance sheet date. This is usually the spot market price of the number of allowances to cover emissions made at the balance sheet date.
B.4.1.2 Alternative accounting policies Many entities have applied alternative accounting policies as IFRIC 3 often resulted in accounting mismatches (either a measurement mismatch when emission rights are measured at cost, or a recognition mismatch when emission rights are measured at fair value through other comprehensive income). The main alternative accounting policies applied include: Net liability approaches; and The government grants approach. Net liability approach Under the net liability approach emission allowances granted for free are recognised but measured at a nominal amount (i.e., zero). The entity records a liability, under IAS 37, only to the extent that actual emissions made exceed the emissions rights granted and still held. The provision is measured at the current market price of emission allowances. No provision is recognised for the expected future shortfall of emissions allowances as, at the reporting date, there is no liability in respect of future emissions. The obligating event is the emission itself. Some schemes cover more than one year. Sometimes an entity is unconditionally entitled to receive allowances for a certain number of years and to carry-over emissions allowances to future years. In such cases, when applying the net liability approach, an entity may choose to measure deficits on the basis of: An annual allocation of emission rights (this seems to be the method currently applied by most of the power and utility entities in Europe), or An allocation that covers the entire current phase of the scheme (provided that the entity is unconditionally entitled to all the allowances for the current phase of the scheme). The method chosen must be applied at each reporting date. If the annual allocation basis is chosen, any deficit is measured on this basis and rights cannot be carried between years.
B.4 Emission rights under a cap and trade scheme and similar schemes
Many countries have developed schemes to reduce the emission of pollutants or to encourage development of power generation capacity from either renewable or less polluting technology. This section discusses the accounting issues associated with some of the most common schemes, including: Emission rights under a cap and trade scheme Certified emissions reductions Green or renewable certificates
B.4.1 Emission rights under a cap and trade scheme

Some countries seek to reduce emissions by allocating emission rights to entities up
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Box 3: Summary of alternative accounting policies for emission rights under a cap and trade scheme and similar schemes
Provision recognised on a gross basis as emissions are made? 'Net liability' approach (provision recognised as emissions exceed granted rights still held)2
Government grants' approach1
Yes
No
Provision measured at fair value at balance sheet date? Yes Measure provision: Number of emissions made x market value of emission rights at balance sheet date No Measure provision: Emission rights held and granted at carrying amount + emissions made where no right is held at the market value of emission rights at balance sheet date
Provision measured at fair value at balance sheet date? Yes Measure provision: Number of emissions made x market value of emission rights at balance sheet date No Measure provision: Emission rights held and granted at carrying amount + emissions made where no right is held at the market value of emission rights at balance sheet date
Remeasure emission rights held to remit at market value at balance sheet date through P&L? Yes Will offset the impact of the measurement of the provision through the income statement. The net impact on the income statement will depend on the amortisation of the deferred income also (refer1)
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Remeasure pruchased emission rights held to remit at market value at balance sheet date through P&L? No Method equivalent to IFRIC 3. Impact on income statement from recognition of the provision will be offset by the amortisation of the deferred income but will not match this exactly Yes Will offset the impact of the measurement of the provision through the income statement No The impact of measurement of the provision through the income statement is not offset
Under the Government Grants approach, granted emissions are initially mesured at fair value at grant date. Deferred income is credited and released to the P&L over the allocation period 2 Under the Net Liability approach, granted emission rights must be measured at nominal amount, i.e. nil
Any liability is measured at the best estimate of expenditure required to settle the obligation at the balance sheet date. The obligation is measured at the spot market price of the number of allowances to cover emissions made to the balance sheet date, unless the entity applies an accounting policy where purchased rights impact the measurement of the provision. Refer to Purchased emission rights impact on net liability approach below. Purchased emission rights impact on net liability approach Entities will often purchase emission rights to cover any shortfall in granted rights. (section F.1 addresses the accounting for emission rights in a business combination). An entity can choose an accounting policy whereby these purchased rights impact the application of the net liability approach. The two main methods to do this are the carrying value method and the reimbursement rights approach. These are described below. Accounting for forward contracts over emission rights is discussed at section B.4.1.5.
Carrying value method An entity may measure the provision for emissions based on the carrying amount of emission rights it has on hand. The provision for any excess emissions is based on the market price at the reporting date. Reimbursement rights approach Alternatively, an entity may view their purchased emission rights as reimbursement rights in respect of their liability. Therefore, to the extent the number of emission rights on hand does not exceed the number of emission rights necessary to settle the liability, it can re-measure these purchased rights to fair value (market price at reporting date) through profit and loss. Consequently, part of the purchased rights and the provision will be measured at market price. Government grants approach An entity may initially recognise the emission rights granted by the government at their fair value (rather than at a nominal amount, i.e., zero). These granted rights are measured at fair value at grant date and deferred income is recognised for the difference to the amount paid (generally
nil). The deferred income is released to the income statement on a systematic basis over the compliance period. The liability is recognised when emissions are made. This is similar to the requirements under IFRIC 3, however different alternatives for the measurement of the liability can be applied. The liability can be measured either at: The fair value of the emission rights at the reporting date; or The carrying amount of the rights in hand and at fair value for any shortfall (consistent with the carrying value approach). When measuring the liability at the fair value of the emission rights at the reporting date, the entity could measure the granted rights, which it will use to settle the liability to fair value through profit and loss (consistent with the reimbursement rights approach). Summary of alternative accounting policies The recognition and measurement of a provision under the government grants approach and net liability approach are also described in Box 3.
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B.4.1.3 Amortisation and impairment testing of emission rights Generally, emission rights should not be amortised. In a cap and trade scheme, the economic benefits are only consumed when the right is surrendered to settle obligations arising from emissions made (or by selling it to another party), at which point, it will be derecognised. However, it is necessary to perform an impairment test, in accordance with IAS 36, whenever there is an indication of impairment. Emission rights that are held by an entity for the purpose of settling its obligations (rather than for sale on the market) are often tested for impairment as part of a larger cash generating unit. Therefore, there is not an automatic impairment charge when an indicator of impairment triggers an impairment test and the market value of an emission right is lower than its carrying amount. B.4.1.4 Sale of emission rights The sale of an emission allowance that was recognised as an intangible asset is recorded as a sale at the fair value of the consideration received. Any difference between the fair value of the consideration received and its carrying amount should be recorded as a gain or loss, irrespective of whether this creates an actual or an expected deficit in allowances held. If it creates an actual deficit, an additional liability will have to be recognised with a charge to the income statement. B.4.1.5 Forward contracts for emission rights If an entity enters into a forward contract to sell or purchase an emission right, IAS 39 paragraph 5 is applied to determine whether the contract is a derivative within the scope of IAS 39. Refer to section A.1.1 for an overview of the scope of IAS 39. When making the assessment for forward sales contracts, entities should consider that the quantity of the emission rights
received is not within the control of the entity. In some cases entities receive more rights than they expect to use and they sell those rights on the market through forward contracts. If the entity does not have a past practice of net settlement or an intention of actively trading emission rights, the forward contract may have been entered into for own use purposes and would not be within the scope of IAS 39. Although it is not the entitys business to sell emission rights forwards it could still be considered to be a normal sale transaction as the quantity of emission rights received is not within the control of the entity. An entity may also enter into forward contracts to purchase emission rights. This may be to supplement a shortfall in emissions held compared with actual or projected emissions. An entity must assess whether it has a past practice of net settlement or an intention of actively trading emission rights. If the forward contract has been entered into for own use purposes (and meets all other criteria as discussed in section A) then it would not be within the scope of IAS 39 if the rights will be physically delivered under the contract. However, an entity may actively trade emission rights at the same time and be unable to determine which forward contracts will result in a purchase or sale of emission rights for own use. Own use accounting cannot then be applied if there are no controls in place to separate forward contracts entered into for trading purposes and those for own use. B.4.1.6 Accounting by brokers/traders A broker-trader may hold emission rights for sale in the ordinary course of their business. Therefore, these rights meet the definition of inventory and can be recorded at either the lower of cost and net realisable value or at fair value less costs to sell in accordance with their policy as permitted by IAS 2.
B.4.2 Certified emissions reductions

Under the Kyoto protocol, the Clean Development Mechanism (CDM) allows Annex 1 countries (mainly developed nations) to invest in clean projects in developing countries (host countries) and to receive Certified Emission Reductions (CERs) in return. CERs can either be used by an entity, up to a certain limit, to fulfil its obligations under some emissions trading schemes (for example, the European Union emissions trading scheme) or they can be sold to other entities. Only projects that meet additionality criteria qualify as CDM projects. A key aspect of additionality is that the project produces lower emission than a less expensive alternative and that the project would not have been implemented without the additional incentive provided by CERs. The process for approving the issuance of CERs through the CDM registration is complex and depends on several qualification criteria. CERs are issued only for actual reductions of greenhouse gas emissions achieved by a registered project, below the set baseline, that has been verified and certified by a relevant independent authority. The CER scheme is a baseline and credit scheme. Entities earn CERs for emissions reductions below a set baseline. This is a different model to a cap and trade scheme, in which an aggregate cap on emissions is distributed in the form of emission rights allowances. The withdrawn IFRIC 3 addressed cap and trade schemes only and, therefore, is not applicable by analogy to CERs. Below we discuss the accounting for: A project promoter that is granted CERs A purchaser of CERs Forward contracts for CERs Accounting by brokers/traders. Accounting for CER/emission rights swaps is discussed at section E.4.
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B.4.2.1 A project promoter that is granted CERs CERs are government grants. Therefore, we believe that they must be recognised when there is reasonable assurance that the entity investing in the CDM scheme will comply with the conditions attached to receiving the CERs. The earliest point that CERs can be recognised is when the actual emission reductions have been realised and the entity has reasonable assurance that the reductions will be confirmed during the verification and certification process by the respective independent authority. When making this assessment the entity must take all contractual terms and conditions into account. Initial recognition The CERs will usually be recognised as intangible assets per IAS 38. However, it may be appropriate to recognise CERs as inventory in accordance with IAS 2 if they are held for sale in the ordinary course of business or to settle an emissions liability in the ordinary course of business. The CERs can be measured initially at fair value or nominal value (i.e., nil). CDM projects often result in higher costs than other projects. Therefore, an entity may want to recognise the grants at fair value to (partly) offset the higher operating or investment costs. If the CERs are recognised at fair value, the grant is recognised in the income statement in connection with the related costs. The costs will usually have been incurred before the CERs are granted. In such cases, the grant is recognised in the income statement immediately. However, if the expenses incurred to achieve emission reductions have been capitalised, the grant is either deducted from the asset or recognised as deferred income. In both cases, the benefit from the grant is recognised in income over the life of the asset to which it relates.
Subsequent recognition When CERs are recognised as intangible assets, they are subsequently measured at cost or the revalued amount. If an entity wishes to apply the revaluation model permitted under IAS 38, it must follow the guidance in that standard for the subsequent revaluation, including the requirement that an active market exists, as defined in the standard. If an entity measures the CERs at cost, they will not normally be amortised as the benefits are not consumed while the CERs are held, but are realised by either settlement of an existing emission liability or through sale. However, IAS 36 Impairment of Assets should be applied to determine when an entity should recognise an impairment loss. Whenthe CERs are recognised as inventory, they are subsequently measured at the lower of cost or net realisable value, in accordance with IAS 2. B.4.2.2 A purchaser of CERs An entity that purchases CERs will often record them as intangible assets at cost, with subsequent measurement at cost (or lower recoverable amount) or at the revalued amount (assuming the requirements of IAS 38 are met). Purchased CERs will be accounted for in the same way as purchased emission rights. Refer to section B.4.1.2 for further details. B.4.2.3 Forward contracts for CERs If an entity enters into a forward contract in relation to the CERs, paragraph 5 of IAS 39 is applied to determine whether the contract is a derivative scoped into IAS 39. Refer to section 4.1.5 for further details. B.4.2.4 Accounting by brokers/traders A broker/trader accounts for CERs in the same way as they would account for emission rights, as described in section B.4.1.6 above.
B.4.3 Green or renewable certificates

Some countries have schemes to promote electricity production from renewable sources. This is often achieved by the government granting certificates to the producers of green energy, which may be referred to as green certificates, renewable energy certificates (RECs), tradable renewable certificates or renewable obligation certificates, or similar. Usually, entities that distribute electricity must obtain a certain percentage of power delivered to customers from renewable sources. A distributor must obtain and remit green certificates for the required amount of renewable energy. Green certificates are either purchased directly from the generator of renewable energy or from a market. If the distributor does not have the required number of certificates, it must pay a penalty to the government. The requirement to remit certificates creates a market and gives value to green certificates. This enables producers of renewable energy to obtain reimbursement for the costs of producing renewable energy (which are generally higher) and/or encourages producers to produce electricity from renewable sources. Below we discuss the accounting for: Producers of renewable energy Distributors of renewable energy (including those that do and those that do not also produce renewable energy) Accounting by brokers/traders B.4.3.1 Accounting by producers of renewable energy Green certificates are government grants and should be recognised as intangible assets when there is reasonable assurance that the entity will be entitled to them, which is the point in time when the green electricity is produced. Government grants may be measured initially at either fair value or nominal value (cost). If the
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certificate is initially recognised at fair value, the credit is either recognised as a reduction in production costs in that period, as the grant is to compensate for the higher cost of producing from renewable sources, or as other income. The certificate can be subsequently measured at fair value, if both an active market and the other requirements of IAS 38 are met. Note that it may be appropriate to recognise green certificates as inventory in accordance with IAS 2 if they are held for sale in the ordinary course of business or to settle an emissions liability in the ordinary course of business. This is consistent with the accounting for CERs in section B.4.2.1. B.4.3.2 Accounting by distributors of renewable energy Distributor also produces renewable energy A distributor which also produces renewable energy can either use its granted certificates to remit to the government to satisfy its own requirements or sell them to the market. Consequently, the accounting that can be applied is, in principle, the same as that discussed for emission rights in
section B.4.1 above. In the case of green certificates, the distributor incurs the obligation to remit certificates and, as such, recognises a provision, as (green) sales are recognised; whereas in the case of emission rights the obligation arises, and therefore a provision is recognised, as emissions are made. Distributor does not produce renewable energy A distributor that does not produce renewable energy must recognise a provision as sales are made. The provision is measured at the fair value of green certificates to be remitted at each reporting date. If the entity purchases certificates to meet its obligation they can either be considered reimbursement rights or the provision can be measured on the basis of the carrying value method as described in section B.4.1.2 above. B.4.3.3 Accounting by brokers/traders A broker/trader accounts for green certificates in the same way as they would account for emission rights, as described in section B.4.1.6 above.
B.5 Arrangements containing a lease

The purpose of IFRIC 4 Determining whether an Arrangement Contains a Lease is to identify an arrangement which, in substance, is a lease (even if the contract does not use the term lease). These arrangements convey rights to use items for agreed periods of time in return for a payment or series of payments. IFRIC 4 provides guidance to determine whether payment is being made under an arrangement for the right to use the asset (therefore, in substance, a lease) or for the actual output from the asset (not a lease). The interpretation focuses on contracts such as outsourcing and take-or-pay contracts. The latter are common in the power and utilities industry. IFRIC 4 is applied to determine whether a contract is or contains a lease. If a contract is or does contain a lease, it is accounted for in accordance with IAS 17 Leases. An arrangement is or contains a lease if the following conditions are met: Fulfillment of the arrangement is dependent on the use of a specific asset or assets (the asset); and The arrangement conveys a right to use the asset. This occurs if one of the following are met: The purchaser can directly or indirectly operate the asset as it determines, while obtaining or controlling more than an insignificant amount of its output; The purchaser can control physical access to the underlying asset, while obtaining or controlling more than an insignificant amount of its output; or It is remote that one or more other parties (other than the purchaser) will take more than an insignificant amount of the output of the asset during the term of the arrangement and the price of the output that the purchaser will pay is neither contractually fixed per unit of output nor equal to the current market price per unit of output at the time of delivery.
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B.5.1 Specific asset or assets

An arrangement will not contain a lease unless it depends on a specific asset or assets. If the seller is allowed and has the economic and practical ability to provide the output specified in the contract using other assets not specified in the agreement, the arrangement will not contain a lease. For example, when determining whether a contract to purchase electricity from a power station meets the specific asset test consider the following: Does the contract specify that the electricity be supplied from a specific power station? Does the contract allow the electricity to be sourced from elsewhere? If so, the contract may not be dependent on a specific asset. However, if it is not feasible to source from elsewhere then the contract may be dependent on a specific asset.
B.5.3 A right to use the item

If the arrangement is based upon a specific asset, the entity must determine whether the arrangement conveys a right to use the asset. The entity must consider the tests mentioned in section B.5 above. It is often difficult to determine whether a right to use the item has been conveyed. This is considered below. B.5.3.1 Fixed price per unit of output and current market price per unit of output at the time of delivery Some believe that the term fixed price should be interpreted as absolutely fixed, with no variance per unit based on underlying costs or volumes, including discounts or stepped pricing. Any pricing that is linked to the performance of the underlying asset (e.g., efficiencies, estimated costs plus a margin) can indicate that the purchaser has use of the underlying asset. Others interpret certain fixed prices as fixed according to IFRIC 4. For example: a fixed price per unit adjusted for inflation; or a fixed percentage increase; or stepped prices for different time periods (not linked to different levels of production within the one period). They consider this acceptable, as long as the price is not linked to the underlying performance of the asset. Stepped pricing does not mean price fixed per unit of output. In particular, as the stepped pricing is agreed in advance, it is not equal to the current market price per unit as of the time of delivery of the output. Current market price per unit of output means that the cost is solely a market price for the output of the asset without any other pricing factors. A market price per KWh plus per cent change in the price of natural gas would not be the current market price per unit of the output of the asset. Price increases based on a general index such as a retail prices index are unlikely to result in a current market price for the output in question.
Some believe that current market price means, for example, the spot price of electricity at the date of delivery, without any adjustment factors. Others believe that current market price can also be interpreted to mean, for example, based on a forward market price. If the price per unit is not fixed, or at a market price per unit of output, the substance of the arrangement may be to pass on the economic risks associated with producing the output. This would effectively mean that the purchaser of the electricity is using the asset; therefore it would qualify as a lease. Arriving at these conclusions is judgmental and IAS 1 would normally require disclosure of such key judgments.
B.5.4 Other considerations

B.5.4.1 Lease classification If an arrangement is within the scope of IFRIC 4, it is necessary to determine whether it is an operating lease or a finance lease. The guidance to make this determination is found in IAS 17. If the lease is classified as an operating lease, it is necessary to disclose the minimum lease payments under the contract. B.5.4.2 Interaction with IAS 39 If an arrangement is, or contains, a lease it is automatically excluded from the scope of IAS 39, except in respect of embedded derivatives and for the purposes of derecognition. Any embedded derivatives that are not closely related to their host contract must still be separated and accounted for at fair value through profit or loss. Refer to section A.1.2 for more information about embedded derivatives.
B.5.2 Portions of assets

IFRIC 4 does not address how to determine when a portion of a larger asset is itself the underlying asset for the purpose of applying IAS 17. However, arrangements in which the underlying asset would represent a unit of account in either IAS 16 or IAS 38 are within the scope of IFRIC 4 (IFRIC 4, paragraph 3). The meaning of unit of account is unclear. There are many contracts in the power and utilities industry where this may be an issue. For example, an entity may have a share in part of the capacity of a gas pipeline. However, the share of capacity cannot be regarded as a separate portion, as the lease of some capacity requires the user to be able to utilise the rest of the asset. Similar issues exist if an entity, for example, obtains the entire capacity of one turbine in a power station or a portion of the capacity of a wind farm which has shared supporting infrastructure.
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B.6 Other contracts

B.6.1 Tolling contracts
Generators may lock in returns by contracting out power plant capacity under tolling contracts. A tolling agreement may be characterised as an agreement whereby One party owns (and bears the risks on) the inputs to and outputs from a process. This party has the rights to (a portion of) the process capacity (the tollee). Another party may own a facility and agree to operate the process or facility. They charge a tolling fee e.g., per unit of input that is transformed, or per unit of capacity to which rights are granted (the toller). Note that tolling contracts also need to be assessed for a number of issues, including: Whether the contract is a lease or contains a lease: An assessment should be made to determine whether such an arrangement contains a lease (refer to section B.5). Scope of IAS 39: tolling contracts usually require physical delivery of the output and are generally not settled on a net basis. Therefore, they are usually accounted for by generators as own use contracts (refer to section A.1) Embedded derivatives: such an arrangement may contain one or more embedded derivative(s) that might need to be accounted for separately (refer to section A.1.2) Onerous contract: if an entity has entered into a tolling contract that is onerous (i.e., where the unavoidable costs of meeting the obligations under the
contract exceed the economic benefits expected to be received under it) the excess of the costs over the benefits of the contract should be recognised as a provision. IAS 37 requires that onerous contracts be recognised and measured as a present obligation. Measurement is based on the unavoidable costs under a contract and reflect the least net cost of exiting the contract, and Revenue recognition and revenue presentation: since the tollee often owns the inputs and receives respective output, revenue from providing the inputs may not be recognisable. The toller in contrast will need to assess what to present as revenues as they may neither own the inputs nor the outputs. Several variants to tolling contracts are observable. Accordingly, the accounting consequence may vary significantly from case to case.
B.7 Power station reoptimisation

The forecast utilisation of a power plant often changes over time due to alterations in external market and internal factors. This often means that the volume of fuel purchased and output sold under forward contracts needs to be modified. This may be achieved, for example, by taking more or less fuel from contracts with volumetric flexibility and/or buying or selling contracts with offsetting volumes in the market. The external market factors considered when determining forecast generation profiles usually include: weather predictions and their impact on demand; average customer demand profiles; and the entitys expectations of other commodity prices, including related prices such as emission rights (e.g., as this may impact the decision whether to generate or buy from the market to supply customers). This latter factor is often referred to as price optimisation. Internal factors to consider include the power plants marginal costs of production and power plant technical constraints. For example, an individual power plant may have a load restriction due to physical constraints or a limit on the production of certain emissions, such as sulphur dioxide. Sometimes adjustments to the volumes purchased must be made in the very short-term (e.g., in the week or hours leading up to delivery) due to changes in customer demand. This is often referred to as balancing activity. Consequently, an entity will need to consider whether activities to alter volumes purchased or sold under contract are within the scope of IAS 39. The impact of changes can cause all similar contracts to be accounted for as financial instruments as well. Refer to sections A.1 and section E.1 for further information.
B.6.2 Compulsory yield of power

In some jurisdictions, power and utility entities are granted the right to develop a power plant by the government. In return, they must deliver a particular quantity of power at a bargain price to the local government. Power and utility entities must consider whether: The contract with the government is within the scope of IAS 39 (refer to section A.1) Zhe contract is onerous (refer to section B.6.1).
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C Transmission and distribution
C.1. Property, plant and equipment transmission and distribution networks

As discussed in section B.1.1, one of the key issues for power and utility entities is applying the components approach when accounting for PP&E. When applying the components approach to transmission and distribution networks, numerous considerations need to taken into account. Box 4 lists some these considerations. The considerations outlined in Box 4 are not an exhaustive list of issues, rather they are points to consider when applying the components approach.
Box 4 Considerations when applying the components approach. Different useful lives must be applied to main grids and sub grids as well as power grids and gas grids; The residual value of the grid is significant due to the need for continuous renewal Useful life is impacted by service concession arrangements with the municipality/local authority (refer to section C.5) Extensions of grids should be capitalised To apply a materiality threshold to renewals of grids to determine whether they are capitalised or recognised as maintenance expenditure The useful life of the grid needs to be continuously extended due to its renewal. Note that this point should be considered in conjunction with the previous point and also that a replacement part has a new useful life over which that part should be depreciated Similar components of a grid (like poles or cables) can be grouped as one item of PP&E in the fixed asset register The impact of extensions has an impact on the useful life of a grid. For example, if a grid has an original useful life of 40 years and five years later an extension is constructed, then the useful life of this extension maybe 40 years (not 35). Consider whether this can be justified by the different maintenance cycles between the old part of the grid (which will be replaced in 35 years) and the extension (which will be replaced in 40 years) In some jurisdictions infrastructure assets, such as power distribution networks, were accounted for using renewals accounting under their national GAAP. Renewals accounting requires that the level of annual expenditure required to maintain the operating capacity of the infrastructure At least the following components need to be identified as separate items High-Voltage grids Land Buildings (for example, buildings for sub-stations) Technical equipment (for example, protection and measurement equipment, control devices) Overhead lines (for example, 380/230KV steel) Cable (e.g. 380/230KV) Current transformers Distribution grid Land Buildings (for example, sub-plant buildings) Piping Cable tunnel Cable Cables for communication (under/overground) Open wire (steel, concrete and wood) Sub-station without buildings Sub-station technical equipment Power sub-stations without buildings Power sub-stations technical equipment Power sub-stations (poles, steel and wood) Cable for connection to customers Open wire for connection to customers Counters and measuring devices mechanical Counters and measuring devices electronic Mobile power sets asset is recognised in the income statement as an expense is a surrogate for the depreciation normally charged for the period, on the grounds that no useful life can be reliably estimated. Renewals accounting is prohibited under IAS 16.
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C.2 Impairment of power stations and grids

Impairment is one of the other major issues to consider when accounting for PP&E. We discuss some of the key issues to consider when applying IAS 36 to power stations, grids and related assets.
External indicators New and/or cheaper technology
Internal indicators Increased maintenance costs, refurbishment, or major inspections Increased cost of distribution Change in useful life due to contractual arrangements Operational issues including unplanned outages
Changes in demand patterns Overcapacity in the market
C.2.1 Indicators of impairment

A power and utility entity must assess whether there is an indicator of impairment at each reporting date. If an indicator exists an impairment test must be performed in accordance with IAS 36. The standard provides examples of internal and external indicators of impairment. In addition, an entity must consider any other relevant indicators. Some examples of indicators of impairment that suggest a power plant or a grid may not be generating sufficient incremental cash flows to recover the costs incurred to build or acquire and decommission a (group of) asset(s) are included in the table to the right.
Reduction in the spark spread as a result of reduced selling price per MWh or increased price of fuel per MWh Change in incentives
Physical damage to the asset
Changes in the environmental and A significant increase in any decommissioning provision close to the regulatory environment governing the installation, operation and decommissioning end of the production phase of the power station An increase in price of emission rights (or similar) and of deficiency payments Reduction of grid fees due to regulation New competitors in the market Increased cost of capital
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C.2.2 Determining the cash generating unit (CGU) for power stations
IAS 36 provides specific guidance to determine CGUs. It states that a CGU is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets. Entities must consider whether there is an active market for the output of an asset when identifying CGUs. If there is an active market for the output produced by an asset or group of assets, the assets are identified as a CGU, even if some or all of the output is used internally. The standard states that the existence of an active market means that the CGU could generate cash inflows independently from the rest of the business by selling output on that market. Whether an active market for the output exists or not must be assessed on a case-by-case basis. This requirement may impact power and utility entities. For example, entities with more than one power station often manage production from multiple power stations on a portfolio basis. Such entities must carefully consider whether all (or a cluster of) power stations are part of the same CGU, or whether each power station is part of a separate CGU.
after it has been used to operate the asset or to obtain benefit from that asset). This applies even if the part of inventory that is deemed to be an item of PP&E cannot be separated physically from the rest of inventory.
applying IFRS. The current consensus among existing IFRS reporters was that no regulatory assets or liabilities are recognised, unless they meet the definition of a financial asset or a financial liability (these arise in few regulatory regimes) However, the IASB decided to add a project on rate-regulated activities to its agenda. The Board acknowledged that this was a matter of significant interest in a number of countries that would be adopting IFRS in the near future and where recognition of regulatory assets and liabilities was either permitted or required. In July 2009, the IASB issued an exposure draft on rateregulated activities, which is discussed below.
C.4 Rate regulated activities

In many countries the provision of utilities to consumers is regulated by the government. The regulator, usually an agency of the government, sets or supervises the prices. Regulatory mechanisms vary from jurisdiction to jurisdiction. The regulator may set the prices in a manner that enables the entity to recover past or scheduled future costs. Conversely, the regulator may also decide that prices should be reduced in the future to return to customers excess amounts collected in past periods. Consequently, the future price that a utility is allowed to charge its customers may be influenced by past cost levels and investment levels. Under a number of national GAAPs accounting practices have developed whereby an entity accounts for the effects of regulation by recognising a regulatory asset (or liability) that reflects the increase (or decrease) in future prices approved by the regulator. Historically, these regulatory assets and regulatory liabilities have generally not been recognised under IFRS. During 2008 the IFRIC considered for a time whether regulated entities could or should recognise an asset or a liability as a result of regulation by regulatory bodies or governments. The IFRIC again decided not to add the issue to its agenda, coming to the same conclusion as before that whilst rate regulation is widespread and significantly affects the economic environment of regulated entities, there did not seem to be significant divergence in practice for entities that were already
C.4.1 Scope of the proposals

The scope of the proposals is intended to be restrictive, applying only to entities whose operating activities meet both of the following criteria: An authorised body (the regulator) establishes the price the entity must charge its customers for the goods or services that the entity provides and the customers are bound by that price The price established by regulation (the rate) is designed to recover the specific costs the entity incurs in providing the regulated goods or services and to earn a specified return (cost-of-service regulation). The specified return could be a minimum or range and need not be fixed or guaranteed Cost-of-service regulation is defined as a form of regulation for setting an entitys prices (rates) in which there is a causeand-effect relationship between the entitys specific costs and its revenues. Forms of regulation that establish different rates for different categories, such as different classes of customers or volumes purchased, are within this scope provided that the regulator approves the definition and the rate for each of those categories and that all customers of the same category are bound by the same rate. For example, the rate-regulated activities of an entity would
C.3 Gas in a distribution network or storage

Power and utility entities which distribute gas or have gas in storage often must retain a certain quantity of gas in their gas distribution network or storage facility to ensure that the appropriate pressure is maintained for operational purposes. Such gas should be accounted for as PP&E if it is: Not held for sale or consumed in production; Necessary to operate or benefit from an asset during more than one operating cycle; and Its cost cannot be recouped through sale (or it becomes significantly impaired
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not be excluded from the proposals simply because the entity is also engaged in unregulated activities. However, regulatory mechanisms applying targeted or assumed costs, such as industry averages, rather than an entitys specific costs, are outside the scope of the proposals. The scope of the proposals is limited to regulation based on an entitys actual costs because the Board has concluded that a regulatory asset can only be deemed to exist if the entitys rights under rateregulation relates to identifiable future cash flows linked to costs it previously incurred, rather than relating to any expectation of future cash flows based on the existence of predictable demand. Such a cause-andeffect relationship must be evident for an asset to exist.
C.4.2 Recognition and measurement

The Exposure Draft (ED) proposes that when an entity falling within its scope has the right to increase or the obligation to decrease rates in future periods as a result of the actual or expected actions of the regulator, it shall recognise: A regulatory asset for its right to recover specific previously incurred costs and to earn a specified return; or A regulatory liability for its obligation to refund previously collected amounts and to pay a specified return.
costs from its customers. This consideration should take into account the net effect that the imposed increase or decrease in prices is expected to have on the level of customer demand or competition during the period of cost recovery. If an entity concludes that it is not reasonable to assume that it will be able to collect sufficient revenues from its customers to recover its costs, this is an indication that the cash-generating unit in which the regulatory assets and regulatory liabilities are included may be impaired and it will have to be tested for impairment in accordance with IAS 36. Regulatory assets and liabilities would be presented separately from other assets and liabilities on the face of the balance sheet, classified as current and non-current items. Offsetting would only be allowed for each category of asset or liability subject to the same regulator. The ED also proposed extensive disclosure requirements. At the time of writing it is difficult to determine how this exposure draft will be received. Some might point to the way that a customer base acquired in a business combination is recognised as an intangible asset and regard the exposure draft as a logical extension of this thinking to assets and liabilities that arise in situations where a regulator is effectively negotiating on behalf of a whole customer base. Others might point to the current lack of diversity in practice and question the need for the proposed new standard. The challenge for the IASB will be twofold: to define clearly situations and regulatory environments in which it is appropriate to recognise regulatory assets and liabilities and to make the case for its proposals to current users of IFRS.
Accordingly a regulatory asset (or liability) is recognised to reflect amounts that would otherwise be recorded in that period in the statement of comprehensive income as an It is clear that a scope restriction would be expense (or revenue). That asset or required, because entities operating outside liability should be carried initially and at the a regulatory environment might look for end of subsequent reporting periods at its similar cause-and-effect relationships. For expected present value. Such an expected example, if a customer contractually agrees present value would comprise the following to suffer a future price increase on the basis elements for a regulatory asset or a regulatory liability: of data demonstrating that its supplier had incurred higher-than-reasonable An estimate of the future cash flows that production costs in the past, the supplier will arise in a range of possible outcomes might try to argue that there is just as An estimate of the probability of each compelling a case for recognising an outcome occurring intangible asset for the right to future price The time value of money, represented by increases. the current market risk-free rate of interest The price for bearing the uncertainty In addition, given the wide range of inherent in the regulatory asset or regulatory frameworks worldwide, it will be regulatory liability. important that such a scope restriction clearly identifies which regimes would fall under the scope of the proposals and which The proposals also require that regulatory would not. assets are subject to a test of recoverability, whereby the entity considers the extent to which it will recover the previously incurred
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C.5 Service concession arrangements

Service concession arrangements (SCAs) have evolved over recent years as a mechanism for providing public services. Under such arrangements, private capital is used to construct and/or maintain the infrastructure used to provide major facilities for public use, including water distribution facilities and energy supply networks. IFRIC Interpretation 12 Service Concession Arrangements addresses the accounting for SCAs.
Box 5: Decision tree to determine if an arrangement is within the scope of IFRIC 12
Does the grantor control or regulate what services the operator must provide with the infrastructure, to whon it must provide them, and at what price? Yes Does the grantor control through ownership, beneficial entitlement or otherwise, any significant residual interest in the infrastructure at the end of the service arrangement?1 Yes
No
Outside the scope of IFRIC 12
No
No2 Is the infrastructure existing infrastructure of the grantor to which the operator is given access for the purpose of the service arrangement? Yes
C.5.1 Scope
IFRIC 12 applies to public-to-private SCAs if the infrastructure is constructed or acquired by the operator as part of the arrangement or is provided access by the grantor and: The grantor controls or regulates what services the operator must provide with the infrastructure, to whom it must provide them, and at what price; and The grantor controls through ownership, beneficial entitlement or otherwise any significant residual interest in the infrastructure (if it exists) at the end of the term of the arrangement. If there is no significant residual interest at the end of the arrangement (that is, the arrangement is for the entire useful life of the asset) the grantor is still considered to control the infrastructure,. Hence it will be in scope. Infrastructure assets that are existing assets of the operator prior to entering into the arrangement are not within the scope of the interpretation and IAS 16 will continue to apply to such assets. If the contract is within the scope of IFRIC 12 it is not within the scope of IFRIC 4.
Is the infrastructure constructed or acquired by the operator from a third party for the purpose of the service arrangement?
No
Yes
Within the scope of IFRIC 12: Operator does not recognise infrastructure as property, plant and equipment or a leased asset
If the asset has no significant residual interest as it is a whole of life arrangement, the grantor is considered to control ownership.
2 Asset owned by the operator before the arrangement is entered into, that are to be used in the arrangement are outside the scope of this interpretation.
C.5.2 Accounting treatment

Infrastructure within the scope of IFRIC 12 should not be recognised as PP&E of the operator as the grantor is considered to control the assets. Instead, if the operator provides construction or upgrade services it recognises the consideration received or receivable as either a financial asset or an intangible asset. A financial asset is recognised to the extent that the operator has an unconditional contractual right to receive cash or other
financial asset(s) from the grantor for construction services. An unconditional right also exists when the grantor guarantees the operators cash flows by agreeing to pay either (i) specified or determinable amounts or (ii) the shortfall, if any, between user payments and specified or determinable amounts. In these circumstances the grantor bears the risk (demand risk) that the cash flows generated by the users of the public service will not be sufficient to recover the operators investment. The financial asset is recognised during the period of
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construction giving rise to revenues from construction, which are then recovered during the period of use of the asset as the operator receives the guaranteed cash flows. An intangible asset is recognised to the extent that the operator receives a right to charge users for the public service. In these circumstances the operators revenue is conditional on usage and it bears the risk (demand risk) that the cash flows generated by users of the public service will not be sufficient to recover its investment. The operator has no contractual right to receive cash when payments are contingent on usage, even when the operators return is very low risk. The construction services are exchanged for the intangible asset being the right to charge users of the public service, and revenues are subsequently generated from users. When the operator is paid for its services partly by a financial asset and partly by a licence to charge users, the grantor and operator share the (demand) risk. In this case both components of the consideration are to be recognised separately.
When the operator capitalises borrowing costs under IAS 23 only an intangible asset in an SCA meets the definition of a qualifying asset. When a financial asset is recognised, it will not be a qualifying asset, although it will accrue interest as it is measured at amortised cost. Most SCAs contain contractual obligations to: (a) maintain the infrastructure to a specified level of serviceability or (b) restore the infrastructure to a specified condition before it is handed back to the grantor at the end of the service arrangement. To the extent that an intangible asset is recognised, these contractual obligations to maintain or restore infrastructure should be recognised and measured in accordance with IAS 37, i.e., at the best estimate of the expenditure that would be required to settle the present obligation at the balance sheet date. Any upgrade element is capitalised as part of the intangible asset. Disclosure requirements with regard to SCAs are set out in SIC-29 Service Concession Arrangements: Disclosures.
C.6 Arrangements that may contain a lease transmission contracts and capacity contracts
In section B.5. we discussed instances where power and utility entities may have entered into contracts which are or contain a lease. Arrangements where a power and utility entity enters into a contractual arrangement conveying the right to use a part of its transmission assets to third parties may also be or contain leases. For example, consider a contract for capacity in a gas pipeline to transport gas from one physical location to another; or a contract for capacity in a gas storage unit. For further information, refer to section B.5. In particular, consider whether the arrangement is for a portion of an asset, as discussed in section B.5.2.
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D Retail customers
Power and utility retail customer contracts are generally either end-user customers, such as households or larger industrial and commercial customers (e.g., factories or shops). In this section, we discuss issues associated with connection fees and transfers of assets from customers; customer acquisition costs; and the impact of IAS 39 in the context of retail customers.
to a supply of goods or services, or both. However, if the transfer is a government grant (within the scope of IAS 20) or the asset is used in a service concession arrangement (refer to section C.5), the interpretation will not apply.
its cost on initial recognition. When cash is transferred, the entity assesses whether the asset to be constructed meets the definition of an asset that is, it will be within the entitys control when it is completed.
D.1.2 Recognising an asset
D.1.3 Recognising revenue

If the asset is recognised at fair value, it is accounted for as an exchange transaction. That is, the entity is considered to have received the asset in exchange for the delivery of services. Examples of services (to be) delivered by the entity include connection to a network and/or providing ongoing access to a supply of goods or services. Entities must determine each identifiable service within the agreement and recognise revenue as each service is delivered. The fair value of the total consideration received (the asset or cash to acquire the asset) is allocated to each of these identifiable service(s). The following is a summary of the features identified in the interpretation that indicate the service is a connection to a network (which is delivered immediately) and features that indicate the service is to provide ongoing access to a supply of goods or services (which is delivered over the period of the arrangement): Ongoing access to a supply of goods/ services
The first step is determining whether the asset qualifies for recognition. An assessment must be made to determine whether the transferred item meets the definition of an asset as set out in the IFRS Framework. A key element in this definition Power and utility entities may receive items is establishing whether the entity has control of the item. The right of ownership of PP&E from their customers, or cash to may be transferred, but this is not acquire or construct specific assets from indicative that control has transferred. This their customers. These assets are used to will require an analysis of all facts and connect customers to a network and/or circumstances, such as, can the entity: provide them with ongoing access to a Exchange the asset for other assets to supply of goods and/or services such as deliver the same service electricity, gas and water. The diversity of accounting methods used by entities for the Employ the asset to produce other goods or services or settle a liability assets they received led the IFRIC to issue Charge a price for others to use it Interpretation IFRIC 18 Transfers of Assets Decide how the transferred asset is from Customers. The interpretation operated and maintained and when it is provides guidance on when and how an replaced entity should recognise such assets.
D.1 Connection fees and transfers of assets from customers
This interpretation is to be applied prospectively to all transfers of assets from customers received on or after 1 July 2009. Entities may choose to apply this interpretation to earlier periods, provided valuations were obtained at the time those transfers occurred.
If the definition is met, the asset is measured at its fair value, which becomes Connection to a network
D.1.1 Scope of the interpretation

IFRIC 18 applies to all entities that receive an item of property, plant and equipment or cash for the acquisition or construction of such items from customers. These assets must then be used to connect the customer to a network or to provide ongoing access
Connection is delivered to the customer and Goods or services received via the connection are charged at a price lower represents stand-alone value for that than that paid by other customers who customer have not contributed an asset Fair value can be reliably measured Goods or services received via the connection are charged at the same price paid by other customers who have not contributed an asset
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Box 6: Accounting decision tree for transfers of assets from customers
Is the transferred item an asset controlled by the entity? Yes No
Where the identifiable service is providing ongoing access to a supply of goods or services, the terms of the arrangement with the customer will determine the period over which revenue must be recognised. In the absence of such a term, revenue is recognised over a period no longer than the useful life of the respective transferred asset. The accounting can be summarised in the decision tree in Box 6.
Entity receiving the asset recognises the asset at fait value
Entity receiving the asset does not recognise an asset
Identify the service(s) being provided in exchange for the asset Ongoing access to goods/services Recognise revenue over the period that access is proved* Connection to network Recognise revenue when the connection to the network is completed
D.1.4 Impacts
As differing practice have developed, many power and utility entities may need to change their revenue recognition policies, therefore having a possible significant impact on their future operating results and net assets positions. The requirement for the entity to assess whether or not it controls the asset may result in situations where no asset is actually recognised. Entities will need to carefully assess all conditions surrounding the use of the asset to make this determination which will involve a thorough reading of the agreement and the laws surrounding the operations of the business. In providing the customer with ongoing access and/or goods/services, entities may have difficulties in assessing the period over which the revenue should be recognised. It will be necessary for entities to make detailed assessments of their customers agreements and asset usage in order to determine the appropriate period. In some cases information systems may need to be enhanced to capture relevant data for this assessment, and to amortise the revenue over the period this service is provided.
*If the agreement is silent, this is no longer than the life of the related asset.
D.2 Customer acquisition costs

A power and utilities retailer may have developed a portfolio of customers or built market share as a result of marketing efforts. Consequently, the retailer may expect that customers will continue to purchase commodities from them. To recognise an intangible asset, an entity must demonstrate identifiability, control and the existence of future economic benefits. Expenditure on items that do not meet all three criteria will be expensed when incurred, unless they have arisen in the context of a business combination, where they will form part of the calculation of goodwill (refer to IFRS 3 Business Combinations). In the absence of legal rights to protect or control the relationship with customers, a power and utility entity usually has insufficient control over the retention of customers for the customer relationships to meet the definition of intangible assets. Consequently, all costs in respect of internally developed customer relationships are expensed as incurred.
However, some exchange transactions involving non-contractual customer relationships (other than as part of a business combination) may provide evidence that the entity is able to control the expected future economic benefits, even in the absence of legal control, and that the customer relationships concerned are separable. An entity must carefully consider whether such customer relationships meet the definition of an intangible asset in accordance with IAS 38.
D.3 Application of IAS 39 to retail customer contracts

It is possible that some retail customer contracts are within the scope of IAS 39. To assess whether they are within scope refer to section A.1. Issues which more commonly arise for retail customer contracts are discussed in section A.1.1 and include: Symmetrical default clauses Volume flexibility (a potential written option)
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E Support functions and risk management
E.1 Risk management

Power and utility entities are often exposed to the risk that the prices of their commodity inputs and outputs will change. This exposure occurs for many reasons, for example, if an entity must purchase all of its fuel from the market there is the risk that the price of fuel will increase and its cost may exceed the price for which output can be sold. To respond to such price risk many power and utility entities have established centralised trading or risk management units. The role of a trading unit may be limited to market risk management or it may include profit optimisation (which may or may not include proprietary/speculative trading activities). If the primary intention of a trading unit is risk management, the trading unit may be more likely to enter into contracts that qualify for the own use exemption (refer to section A.1). However, this is not always the case because they may fail the test of paragraph 57 of IAS 39. If the trading unit is trading on a speculative basis, these contracts will be accounted for as derivative financial instruments. Trading units often operate as internal marketplaces in power and utility entities. They buy fuel from the external market and sell it to the generation unit so that the generation unit can produce power. The power produced by the generation unit is purchased by the trading unit which sells it to the retail unit so that it can meet its customers demand or sell the power to the wholesale market. As the trading unit acquires all of a power and utility entitys exposure to the various commodity risks, it is also in a position to economically hedge those risks in the external markets. A power and utility entity may be able to maintain separate trading and physical books and, therefore, account for the physical contracts as own use. However, entities must consider whether any activity to optimise the price obtained for commodity purchases or sales constitutes net settlement of contracts and taints the
forward contracts in the physical book and, therefore, they must all be accounted for as derivatives. Refer to section A.1 for further information about own use and section B.7 for information about optimisation. Power and utility entities should consider that IFRS 7 Financial Instruments: Disclosures requires extensive disclosures of financial instruments, including commodity financial instruments. However, the extent of disclosure required depends on the extent of the entitys use of financial instruments and of its exposure to risk. IFRS 7 requires disclosure of information that enables users of the entitys financial statements to evaluate: The significance of financial instruments for an entitys financial position and performance The nature and extent of risks arising from financial instruments to which the entity is exposed at the reporting date. These disclosures focus on the risks that arise from financial instruments and how they have been managed. These risks typically include, but are not limited to credit risk, liquidity risk and market risk.
All commodity contracts may expose the entity to foreign currency or commodity price risk. IFRS 7 does not apply to contracts to buy or sell a non-financial item that are outside the scope of IAS 39. Therefore, it does not apply to contracts entered into and held for the entitys expected purchase, sale or usage requirements. However, financial instruments held by an entity may be designated as hedging instruments for expected usage commodity contracts and, hence, management may manage its risks from these contracts collectively. If the information provided to management to manage foreign currency or commodity price risk includes both financial instruments and expected usage contracts, it is likely to be the most useful information to present market risk disclosures for both financial instruments and expected usage contracts because it provides a comprehensive picture by reflecting the combined market risk exposures inherent in positions, or transactions concerned, based on the way the entity manages these risks. We believe it is best practice to include expected usage contracts in the IFRS 7 market risk disclosures when it provides the most relevant information. Inclusion or exclusion should be clearly disclosed. IFRS 7 requires a sensitivity analysis be prepared for each significant type of market risk. In this situation, price risk would be disclosed separate from other market risks, but may include both financial instruments and expected usage contracts, for example, expected usage contacts and derivative financial instruments regarded by management as hedges of such contacts. If a sensitivity analysis is prepared, amounts relating to financial instruments within the scope of IFRS 7 and those relating to expected usage contracts outside the scope of IFRS 7 should each be disclosed separately, with additional qualitative and/or quantitative information regarding the risks associated with the expected usage contracts.
E.1.1 Market risk disclosures non-financial items

The requirements of IFRS 7 include sensitivity analyses for each type of market risk. When an entity prepares its own sensitivity analysis for management purposes, such as value-at-risk, that reflects interdependencies between risk variables, it may use that analysis for the purpose of the IFRS 7 disclosures. Under IFRS, an entitys commodity contracts may be considered: Within the scope of IAS 39 because they were entered into primarily for trading purposes or fail the expected usage paragraphs 5-7 Contracts entered into and held for the entitys expected purchase, sale or usage requirements.
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IFRS 7 permits an entity to prepare a sensitivity analysis (such as value-at-risk VaR) that takes account of the interdependencies between risk variables. In this situation, foreign currency and price risk would be included with all other market risk variables. If a VaR analysis is prepared, the entity will not be able to separately disclose amounts relating to financial instruments within the scope of IFRS 7 and those relating to expected usage contracts outside the scope of IFRS 7 unless it prepares separate VaR amounts for each as part of the risk management information provided to management. We believe that a single VaR amount which includes non-financial items outside of the scope of IAS 39 and financial instruments within the scope of IAS 39 to be disclosed, is possible, if this VaR analysis is actually used by management to manage market risk.
E.2 Revenue presentation gross or net?

Determining whether the receipts and payments from commodity contracts should be presented gross or net will depend on the relevant facts and circumstances. As part of the 2009 Annual Improvements project, the IASB amended the Appendix to IAS 18 Revenue and provided guidance on the determination if an entity is acting as a principal or an agent. For entities that had looked to US GAAP for guidance in this area prior to the amendment, it should not fundamentally change previous decisions. Energy contracts to which the own use exemption applies generally result in gross inflows or outflows of economic benefits and are often presented gross. Activities which are a normal link in the value chain will usually fall into this category. Contracts that are within the scope of IAS 39 must be accounted for as if they were financial instruments and measured at fair value. Many commodity contracts that are accounted for as financial instruments are entered into for proprietary trading/
speculative purposes. The inflows (or outflows) of benefits from such activities are, in substance, limited to the trading margin and these contracts are usually presented on a net basis. Some commodity contracts are accounted for as financial instruments, however, are not entered into for proprietary/speculative trading purposes. It is not necessarily clear whether such contracts should be presented on a net or gross basis as it is not always clear which contracts ultimately result in physical delivery. Finding the most relevant presentation policy for integrated power and utility entities can be complex, as often these entities are made up of the following business units: Generation Unit operates power plants and sells power to the trading unit Trading Unit manages risks centrally; enters into contracts with the generation unit and the sales unit; enters into energy contracts on the wholesale-market Sales Unit sells energy to retail customers and local or regional power and utilities Box 7 summarises the various sales transactions that could occur in the operations of an integrated power and utility entity:
Box 7: Example of various sales transactions of an integrated power and utility entity
OTC-Market Energy exchange
Sales: 170 TWh Revenue: EUR 6,8 bn
Purchases: 150 TWh Revenue: EUR 6,0 bn
Trading unit
Sales: 110 TWh Revenue: EUR 4,4 bn Volume: 10 TWh Value: EUR 0,4 bn
Purchases: 90 TWh Cost of sales: EUR 3,6 bn Sales: 80 TWh Sales unit Demand: 80 TWh sales and purchase due to readjustment of hedge ratio Revenue: EUR 12,0 bn Retail customers
Generation unit Production 100 TWh
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When reporting consolidated results, revenues are based on sales to third parties which would be the trading units and the sales units sales of physical power regardless of whether generated by the generation unit or purchased from third parties. Other transactions are usually presented on a net basis. However, while it is easy to identify the sales units sales of physical production (in the example above the sales unit sells power of 80 TWh and realises revenues of EUR 12bn) it will often be difficult to identify the proportion of the trading units sales that represents sales of physical production (in the example above the trading unit sells power of 170 TWh for a total consideration of EUR 6.8bn. However, not all of the underlying sale contracts will represent sales of physical production). Therefore, whether a sales transaction gives rise to revenues depends upon the specific circumstances evaluated against the guidance in IAS 18.
E.3 Commodity hedge accounting

Hedge accounting is a complex topic. In this section we only discuss some high-level issues to consider when applying cash flow hedging to commodity contracts. For further information on the requirements of hedging refer to International GAAP. Cash flow hedging may be important to power and utility entities when forward commodity contracts are within the scope of IAS 39. For example, when forward purchase or sales contracts for a commodity are within the scope of IAS 39 and there is a clear demand requirement for the entity to fulfil. Hedge accounting is also often applied when commodity contracts are denominated in a currency other than the entitys functional currency. For example, a coal fired power station may purchase coal under US dollar-denominated forward contracts and the entitys functional currency is Euros. Various types of derivative contracts are available to hedge these price and currency risks. In order for a hedge to qualify for hedge accounting, all of the following conditions set out in IAS 39 must be met. The general conditions are that: The hedging relationship must be designated and documented, together with the entitys risk management objective and strategy in undertaking the hedge The hedge must be expected to be highly effective
For cash flow hedges, the forecast transaction that is the subject of the hedge must be highly probable and must present an exposure to variations in cash flows that could ultimately affect profit or loss The effectiveness of the hedge can be reliably measured The hedge must be assessed on an ongoing basis and determined to have been highly effective throughout the financial reporting periods for which the hedge was designated. If the hedged item is a non-financial item (for example, a contract to purchase or sell fuel, which is outside the scope of IAS 39), it can only be designated as a hedged item: For foreign currency risks; or In its entirety for all risks This is required because of the difficulty of isolating and measuring the appropriate portion of the cash flows or fair value changes attributable to specific risks other than foreign currency risks. One of the main areas of judgment to consider is the frequency of testing effectiveness when applying hedge accounting to commodity contracts. For example, if an entity hedges forward power purchases and the market settles every half hour, entities must consider whether effectiveness needs to be calculated every half hour or whether a longer time period is acceptable.
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E.4 Emission rights and CER swaps

Some power and utility entities have entered into forward agreements to swap some of their granted emission rights for CERs. Typically, a power and utility entity enters into the swap with an investment bank and the power and utility entity agrees to deliver a specified amount of emission rights in exchange for an equal number of CERs and a cash receipt. Such swaps are generally governed by master netting agreements which usually include provisions for non-delivery in which the defaulting counterparty is required to pay a penalty. This penalty may be fixed or variable and is intended to reimburse the counterparty for undelivered emission rights or CERs and other reasonable costs. For background information about CERs refer to section B.4.2. We discuss the following key accounting issues: Whether the swap is within the scope of IAS 39 How to account for the receipt of cash. Determining fair value Impact on net liability method
E.4.2 Receipt of cash swap is not within the scope of IAS 39

If the cash is received before the swap matures deferred income is recognised in respect of that amount as the emission rights have not yet been delivered. Once the swap matures, the CERs are recognised at their fair value and any difference between: The total of the cash received and the fair value of the CERs received; and The carrying value of the emission right given up (which may be nil) is recognised as a gain (or loss). Any deferred income (from the initial cash receipt, if any) is recognised in the income statement, as part of this net gain (or loss).
E.4.5 Impact on net liability method

If the entity applies the net liability method to account for its emission rights and obligations, the swap may impact the liability recognised. The CER cannot be considered a granted right and is initially recognised at fair value. Therefore, if the CER replaces a granted emission right, the provision must be increased by the relevant amount (refer to section B.4)
E.5 Weather derivatives

Some contracts require a payment based on climatic variables (often referred to as weather derivatives) or on geological or other physical variables. Such contracts are within the scope of IAS 39, unless they meet the definition of an insurance contract. Generic or standardised contracts will rarely meet the definition of insurance contracts because the variable is unlikely to be specific to either party to the contract. The two different types of contracts are those that require a payment: Only if a particular level of the underlying climatic, geological, or other physical variable adversely affects the contract holder. These are insurance contracts as defined in IFRS 4 Based on a specified level of the underlying variable, regardless of whether there is an adverse effect on the contract holder. These are derivatives and within the scope of IAS 39. If a weather derivative is within the scope of IAS 39, it must be measured at fair value, with changes in fair value recognised in profit or loss.
E.4.3 Receipt of cash - swap is within the scope of IAS 39

Before maturity, the swap is measured at fair value with any fair value changes recognised in profit and loss, unless hedge accounting is applied. Any cash received before the swap matures is offset against the fair value of the swap. When the swap matures, the difference between: the total cash and the fair value of the CERs received; and the total of the carrying value of the emission rights given up and the fair value of the swap given up is recognised as a gain (or loss).
E.4.1 Scope of IAS 39

The swap will be within the scope of IAS 39 if it is held for trading purposes and/or will be net settled. It will be outside the scope if it is not net settled and is entered into and held for own use purposes. The swap is likely to be entered into for own use purposes if the CERs to be received will be used to satisfy obligations resulting from the emission of CO2. Note that if the swap contains penalty payment provisions for non-delivery the entity should consider whether these are net settlement clauses. Refer to section A.1 for more information.
E.4.4 Determining fair value

The fair value of the CERs is determined by reference to an active market for CERs or, if no active market exists, on a basis that reflects the amount the acquirer would have paid for the rights in an arms length transaction between knowledgeable willing parties, based on the best information available.
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F Business combinations
Business combinations is a complex area of financial reporting. We highlight two industry-specific issues in this section: emission rights and reassessment of embedded derivatives.
The emission rights held by the acquiree relate to specific items of property, plant, and equipment. Therefore, entities must ensure that there is no double counting of the rights held when determining the fair value of these assets. Refer to section B.4 for more information about emission rights.
F.2.2 Reassessment of embedded derivatives in a business combination

IFRIC 9 does not deal with the acquisition of contracts with embedded derivatives in a business combination or their possible reassessment at the date of acquisition. However, IFRS 3 (as revised in 2008) does deal with this issue. Therefore, until IFRS 3 (as revised in 2008) is applied, entities can make an assessment to determine whether embedded derivatives are closely related to their host contracts at either: The date of the business combination based on the terms of the contract at that date; or The date the acquired entity first became party to the contract unless the business combination significantly modifies the cash flows under the contract Whichever policy is adopted should be applied consistently. However, IFRS 3 (as revised in 2008) requires the acquirer to assess the acquirees contracts based on the conditions as at the date of acquisition, as if the contracts themselves had been acquired. Therefore, the accounting policy choice described above is removed. Refer to section A.1.2 for more information on embedded derivatives.
F.1 Emission rights acquired in a business combination

The accounting treatment for emission rights acquired in a business combination may be different. In a business combination an acquirer must recognise the acquirees identifiable intangible assets (including emission rights) at their fair values, when that value can be measured reliably. Therefore, any emission rights recorded at nil in the acquirees financial statements will be recognised at fair value in the acquirers consolidated financial statements. Consequently, an acquirer cannot apply the net liability approach to emission rights acquired in a business combination, as the rights were not granted through a government grant. Instead, the acquirer should treat acquired emission rights in the same way as purchased emission rights. An acquiree may apply an accounting policy in its separate financial statements whereby its own granted emission rights are measured at fair value and recognise deferred revenue. On consolidation, the deferred income must be reversed by the acquirer as the emission rights were acquired in a business combination rather than by a government grant. In addition, an acquirer can only recognise a provision for its acquirees actual emissions that have occurred up to the reporting date (and not for forecast emissions). Therefore, an acquirer may report a higher emission expense in its income statement in the compliance period in which it acquires a business.
F.2 Reassessment of embedded derivatives

F.2.1 Reassessment of embedded derivatives general
An initial assessment is made to determine whether an embedded derivative is closely related to its host contract. However, IAS 39 provides little guidance to determine whether to revisit this initial assessment throughout the life of the contract. Therefore, the IFRIC published IFRIC 9 Reassessment of Embedded Derivatives. Consequently, entities must assess whether an embedded derivative needs to be separated from its host contract and accounted for as a derivative when the entity first becomes a party to the contract. IFRIC 9 also states that subsequent reassessment is generally prohibited. However, reassessment must occur if there is a change in the terms of the contract that significantly modifies the cash flows that otherwise would be required under it. When determining whether a significant modification has occurred, an entity should consider the extent to which the expected future cash flows associated with the embedded derivative, the host contract or both have changed and whether the change is significant relative to the previously expected cash flows on the contract.
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Global IFRS Power & Utilities contacts
Gerd Ltzeler Global IFRS Power & Utilities Leader Direct tel: + 49 211 9352 18614 E-mail: gerd.luetzeler@de.ey.com Nabeel Pabani Global IFRS Services Direct tel: + 44 20 7951 1105 E-Mail: nabeel.pabani@uk.ey.com
Brazil Aderbal Hoppe Direct tel: + 55 11 2573 3476 Email: Aderbal.a.Hoppe@br.ey.com Canada Ivan Robert Chittenden Direct tel: + 1 416 943 3110 Email: ivan.r.chittenden@ca.ey.com China Yan Feng Xie Direct tel: + 86 10 5815 3540 Email: yan-feng.xie@cn.ey.com Czech Republic Martin Skacelik Direct tel: + 420 225 335 375 Email: martin.skacelik@cz.ey.com France Sophie Ganter Direct tel: + 33 1 46 93 47 97 Email: sophie.ganter@fr.ey.com Germany Olaf Boelsems Direct tel: + 49 40 36132 17715 Email: olaf.boelsems@de.ey.com India Raj Agrawal Direct tel: + 91 124 464 4000 Email: raj.agrawal@in.ey.com Japan Nicola Sawaki Direct tel: + 81 3 3503 1100 Email: sawaki-ncl@shinnihon.or.jp Netherlands Gerard van Santen Direct tel: + 31 88 40 75030 Email: gerard.van.santen@nl.ey.com
Norway Robert Madsen Direct tel: + 47 24 00 21 02 Email: robert.madsen@no.ey.com Oceania Carolyn Pedic Direct tel: +61 3 9288 8358 Email: carolyn.pedic@au.ey.com Poland Anna Sirocka Direct tel: + 48 22 557 7936 Email: anna.sirocka@pl.ey.com South East Europe Helen Nikandrou Direct tel: + 30 210 2886185 Email: helen.nikandrou@gr.ey.com South Korea John M. Gallagher Direct tel: + 82 2 3787 6411 Email: john.gallagher@kr.ey.com Spain Francisco Rahola Carral Direct tel: + 34 944 243 777 Email: francisco.raholacarral@es.ey.com Switzerland Alessandro Miolo Direct tel: + 41 58 286 4654 Email: alessandro.miolo@ch.ey.com United Kingdom David Coulon Direct tel: + 44 20 7951 2248 Email: dcoulon@uk.ey.com United States Katrina Kimpel Direct tel: + 1 202 327 8328 Email: katrina.kimpel@ey.com
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IFRS For Power Sector

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Mastering the challenge

Practical IFRS guidance for power and utilities

Introduction A Wholesale fuel sourcing and sales

Transmission and distribution

Support functions and risk management

A Wholesale fuel sourcing and sales

A.1 Fuel purchase and sales contracts

Consider embedded derivatives

How the entity intends to profit from the contract

Customer base/contract counterparty

How an entity manages its business

How staff are remunerated

Whether value is added by linking parties in the value chain.

Settlement of the contracts

Example 1 Symmetrical default clause

Example 2 Written option in a wholesale gas sales contract

A.1.2 Embedded derivatives in commodity purchase contracts

B.1 Generation property, plant and equipment

B.1.1 Components approach and annual review of depreciation inputs

B.2 Decommissioning provisions

B.1.2 Liquidated damages

B.2.1 Recognising and measuring a decommissioning provision

B.2.2 Changes in an existing provision

B.2.3 Investment in external decommissioning funds

B.4.1 Emission rights under a cap and trade scheme

Government grants' approach1

B.4.2 Certified emissions reductions

B.4.3 Green or renewable certificates

B.5 Arrangements containing a lease

B.5.1 Specific asset or assets

B.5.3 A right to use the item

B.5.4 Other considerations

B.5.2 Portions of assets

B.6 Other contracts

B.7 Power station reoptimisation

B.6.2 Compulsory yield of power

C Transmission and distribution

C.1. Property, plant and equipment transmission and distribution networks

C.2 Impairment of power stations and grids

External indicators New and/or cheaper technology

Changes in demand patterns Overcapacity in the market

C.2.1 Indicators of impairment

Physical damage to the asset

C.4 Rate regulated activities

C.4.1 Scope of the proposals

C.3 Gas in a distribution network or storage

C.4.2 Recognition and measurement

C.5 Service concession arrangements

Box 5: Decision tree to determine if an arrangement is within the scope of IFRIC 12

Outside the scope of IFRIC 12

C.5.2 Accounting treatment

D.1.2 Recognising an asset

D.1.3 Recognising revenue

D.1 Connection fees and transfers of assets from customers

D.1.1 Scope of the interpretation

Box 6: Accounting decision tree for transfers of assets from customers

Is the transferred item an asset controlled by the entity? Yes No

Entity receiving the asset recognises the asset at fait value

Entity receiving the asset does not recognise an asset

D.2 Customer acquisition costs

D.3 Application of IAS 39 to retail customer contracts

E Support functions and risk management