FASB Updates Guidance for Certain Electricity Contractsby
The Financial Accounting Standards Board (FASB) issued guidance on Aug. 10 that specifies whether certain electricity contracts within nodal markets qualify for a normal purchases and normal sales scope exception under Topic 815, Derivatives and Hedging.
A nodal energy market is an interconnected electricity grid operated by an independent system operator with established price points at each node or hub location.
The new guidance â Accounting Standards Update No. 2015-13, Derivatives and Hedging (Topic 815): Application of the Normal Purchases and Normal Sales Scope Exception to Certain Electricity Contracts Within Nodal Energy Markets (a consensus of the Emerging Issues Task Force) â is intended to resolve diversity in practice resulting from two different views on whether certain contracts for the purchase or sale of electricity on a forward basis would be eligible for a scope exception.
Under Topic 815, Derivatives and Hedging, there are two sets of criteria an entity that purchases or sells electricity could consider to determine whether a contract is eligible for the normal purchases and normal sales scope exception. Both sets of criteria include a criterion related to physical delivery.
âQuestions were raised about whether a contract for the purchase or sale of electricity on a forward basis should be eligible to meet the physical delivery criterion of the normal purchases and normal sales scope exception when either the delivery location is within a nodal energy market or the contract necessitates transmission through a nodal energy market and one of the contracting parties incurs charges (or credits) for the transmission of the electricity based in part on locational marginal pricing differences payable to (or receivable from) an independent system operator,â the FASB stated in the Accounting Standards Update.
Some stakeholders felt that those types of contracts meet the physical delivery criterion because the terms of the contract require the physical delivery of electricity â or because it is probable at inception and throughout the term of the contract that it will result in physical delivery. Thus, in their view, those contracts should be eligible for the normal purchases and normal sales scope exception.
Others said those types of contracts do not meet the physical delivery criterion because one of the parties to the forward contract must sell the electricity to the independent system operator, which results in net settlement of the forward contract, making the forward contract ineligible for the exception.
The new guidance specifies that the use of locational marginal pricing by an independent system operator does not constitute net settlement of a contract for the purchase or sale of electricity on a forward basis for delivery to a location within a nodal energy market, even in scenarios in which legal title to the associated electricity is conveyed to the independent system operator during transmission, according to the FASB.
Consequently, the use of locational marginal pricing by the independent system operator does not cause that contract to fail to meet the physical delivery criterion of the normal purchases and normal sales scope exception. If the physical delivery criterion is met, along with all of the other criteria of the normal purchases and normal sales scope exception, an entity may elect to designate that contract as a normal purchase or normal sale.
The amended guidance takes effect immediately and should be applied prospectively.