Nature-dependent electricity: An overview of upcoming amendments to Ind AS 109 and Ind AS 107

Introduction

The National Financial Reporting Authority (NFRA), at its meeting held on 14 January 2026, has recommended amendments to Ind AS 109 Financial Instruments and Ind AS 107 Financial Instruments: Disclosures, to the Ministry of Corporate Affairs (MCA) for notification. Once notified, the amendments will deal with contracts referencing naturedependent electricity and are expected to apply to annual reporting periods beginning on or after 1 April 2026. The amendments are aligned with similar changes to the IFRS Accounting Standards (IFRS), issued by the International Accounting Standards Board (IASB). In this article, we look at the need for an overview of key amendments.

Need for amendments

Contracts to buy or sell non-financial items do not generally meet the definition of a financial instrument. However, contracts that can be settled net-in-cash meet the definition of a financial instrument. Ind AS 109 is applicable to such contracts meeting the definition of a financial instrument and requires derivative accounting. There is only exception to the derivative accounting, viz., the contract to buy or sell nonfinancial items has been entered into and continues to be held for the purpose of the receipt or delivery of the non-financial item in accordance with the entity’s expected purchase, sale or usage requirements. This is known as the ‘own-use exception’ from the scope of Ind AS 109.

In accordance with Ind AS 109, there are various ways in which a contract to buy or sell a non-financial item can be settled net, including when:

1. The terms of the contract permit either party to settle it net.
2. The ability to settle the contract net is not explicit in its terms, but the entity has a practice of settling similar contracts net.
3. For similar contracts, the entity has a practice of taking delivery of the item and selling it in a short period after delivery to generate profit from short-term price fluctuations or dealer’s margin.
4. The non-financial item that is the subject of the contract is readily convertible to cash.

Many entities enter into long-term power purchase agreements (PPA) to purchase electricity from renewable energy sources such as wind or solar power plants, where the timing and volume of power generated is purely nature dependent. In many cases, the purpose of these PPAs is to secure electricity for own use; however, due to the unique characteristics of electricity, including difficulty to store it, and its market structure – i.e., if a purchasing entity is not able to use the electricity within a short period, the electricity may need to be sold back to the market within a specified time. Although these sales occur because of the market structure, and not to profit from short-term price fluctuations, an issue was arising whether the purchasing entity can apply the own-use exemption or it needs to treat the entire PPA as a derivative under Ind AS 109. It is obvious that the application of derivative accounting will create an unwarranted volatility in the statement of profit and loss (P&L). The amendments are aimed at addressing such practical issues.

Scope of the amendments

The Amendments only apply to contracts that reference nature-dependent electricity. These are contracts that expose an entity to variability in an underlying amount of electricity because the source of electricity generation depends on uncontrollable natural conditions, typically associated with renewable electricity sources such as solar and wind power plants(‘in-scope contracts’). Other contracts, for example, contracts for electricity generated from biofuel, are not within the scope of the Amendments because such electricity generation is not subject to the same uncertainty as in-scope contracts. The Amendments cannot be applied by analogy to other contracts, items or transactions.

How we see it

The Amendments scope in contracts for naturedependent electricity that are both physically and virtually settled. However, the Amendments do not cover the accounting for renewable energy certificates (RECs), which typically accompany these contracts. The intention is for the scope to be narrow enough to minimize the risk of unintended consequences.

Amendments to the own-use exception

When evaluating nature-dependent electricity contracts for the own-use exception, the Amendments require an entity to assess if it has been, and expects to be, a ‘net purchaser’ of electricity over the contract period. An entity will be a net purchaser of electricity if it buys sufficient electricity to offset the sale of any unused electricity in the same market in which it sold the electricity. An entity must make this net purchaser assessment based on reasonable and supportable information (that is available without undue cost or effort) about its past, current and expected future electricity transactions over ‘a reasonable amount of time’. When identifying ‘a reasonable amount of time’, an entity must consider variability in electricity generated due to the seasonal cycle of natural conditions, and variability in the entity’s demand for electricity due to its operating cycle. However, a reasonable amount of time must not exceed 12 months.

For example, in a contract where the purchaser is required to take delivery for 100% of electricity generated from a wind or solar plant3, which is in line with the entity’s expected usage per day, the delivery may happen at certain intervals during the day. The risk, in such a case, is that the delivered volumes at a particular hour may exceed the entity’s electricity needs at that time, resulting in sales of excess electricity. Such contracts will be eligible for the own-use exception, provided that the other requirements are met.

It may be noted that if the market offers an entity alternatives to selling its unused electricity, for example, making electricity storage facilities available, then the entity is not permitted to use the Amendments.

How we see it

In India, many entities have entered into long-term PPAs to purchase electricity from wind/ solar plants for their own usage requirements. Our experience is that these entities generally do not sell surplus electricity in the market; rather, they use the ‘banking mechanism’ to store and manage any surplus electricity at any particular point in time. The ‘banked electricity’ can be withdrawn and used within the time frame allowed by the applicable regulations. Considering this, the amendments may have no or negligible impact on entities using the banking facility to store surplus power.

Hedge accounting requirements

Entities are increasingly using contracts for nature-dependent electricity to fix the price at which such electricity will be sold or purchased. However, Ind AS 109 historically required the hedged item to be designated as a specified nominal amount or volume. Any changes to the nominal amount or volume of the hedged item would result in the discontinuation of the hedging relationship. Some entities were still able to apply hedge accounting by designating a fixed hedged volume, but this resulted in ineffectiveness as a result of the hedging instrument having a variable volume.

To overcome the above challenge, the Amendments will allow an entity designating a contract referencing naturedependent electricity as the hedging instrument in a hedge of forecast electricity transactions, to designate a variable nominal amount of forecast electricity transactions as the hedged item. This designated variable nominal amount must be aligned with the variable amount of nature-dependent electricity expected to be delivered by the generation facility as referenced in the hedging instrument.

The Amendments also state that if the cash flows of an in-scope contract designated as a hedging instrument are conditional on the occurrence of the forecast transaction that is designated as the hedged item in accordance with the Amendments, this forecast transaction is presumed to be highly probable. The other hedge accounting requirements of Ind AS 109 continue to apply unchanged.

How we see it

The Amendments provide a practical solution for inscope contracts and should avoid hedge ineffectiveness due to volume uncertainty. However, entities must be aware that ineffectiveness may still arise due to other sources, such as differences between the timing and volume of spot purchases.

Amendments to Ind AS 107

Ind AS 107 has been amended to require disclosures relating to contracts excluded from the scope of Ind AS 109 as a result of the amendments. An entity needs to disclose the below information in a single note:

• Contract features exposing the entity to variability in the volume of electricity and risk of oversupply.
• Estimated future cash flows from buying electricity in appropriate time bands.
• Qualitative information regarding how the entity assessed whether a contract may become onerous.
• Qualitative and quantitative information about the effects on the entity’s financial performance for the reporting period, based on the information used by the entity for the ‘net purchaser’ assessment. The information requiring disclosure includes costs and proceeds associated with the purchase and sale of electricity.

For contracts designated in a cash flow hedging relationship, the entity must disaggregate the information about the terms and conditions by the risk category

How we see it

Obtaining the quantitative and qualitative data needed for the required disclosures may require additional effort and perhaps system updates. However, the intention of amendments is not to disclose information for each contract separately. Entities will need to apply judgement to determine the appropriate level of aggregation to ensure that the disclosures are understandable and meaningful for users.

Effective date and transition

The NFRA has recommended that these amendments be applied to annual reporting periods beginning on or after 1 April 2026. The amendments relating to the own-use exception must be applied retrospectively. An entity is not required to restate prior periods, and it is only permitted to do so if this can be done without using hindsight. If prior periods are not restated, then any difference between the previous carrying amount and the carrying amount at the date of initial application of these amendments is recognized in the opening retained earnings at the beginning of that reporting period.

The hedge accounting amendments must be applied prospectively to new hedging relationships designated on or after the date of initial application. The Ind AS 107 disclosure amendments must be applied when the Ind AS 109 amendments are applied.