Energy contracts and the own-use exemption

When does the own-use exemption apply?

IFRS 9 applies to contracts to buy or sell a non-financial item that can be settled net in cash or another financial instrument, as if they were financial instruments, unless they were entered into and continue to be held for the receipt or delivery of the item in accordance with the company's expected purchase, sale or usage requirements. Electricity and gas are readily convertible to cash in liquid markets, so almost every energy contract can be settled net and the own-use test is what matters.

What counts as settling net?

Settling net covers more than an explicit cash settlement clause. IFRS 9 treats a contract as capable of net settlement where the terms permit it, where the company has a practice of settling similar contracts net, by entering offsetting contracts or selling the contract before delivery, where it has a practice of taking delivery and selling within a short period to generate a profit from short-term price changes or a dealer's margin, or where the item is readily convertible to cash. The second and third practices cause tainting: not just the contract but other similar contracts then fall into IFRS 9.

Own-use exemption: one forward purchase, two outcomes

A utility buys 500,000 MWh of power for delivery next year at $70 to supply its retail customers. At the year end, the forward price for next year is $62.

As own use, the contract is invisible until delivery, unless it becomes onerous because the utility expects to lose money supplying customers with that power. As a derivative, the 4 million loss on the fall in forward prices is recognised now, even though the utility's retail prices may also be fixed and the economic position unchanged. That mismatch is why classification matters so much.

What about volume flexibility and written options?

Supply contracts often let the buyer take more or less volume, or the seller deliver more or less. A written option to buy or sell a non-financial item that can be settled net cannot be an own-use contract, because the company cannot control whether it will be exercised. Volume flexibility the company has bought is not a written option. Contracts that combine both need careful analysis of whether the written element is, in substance, a separate option.

How do energy companies organise their books?

To protect the exemption, companies separate trading activities from supply activities, with different books, mandates and controls. Contracts in the supply book must match forecast customer demand or plant requirements; surplus volumes sold back because of forecasting errors or weather need monitoring so that they do not become a practice of net settlement. For contracts referencing nature-dependent electricity, such as wind or solar PPAs, amendments effective from 2026 allow such sales without losing own use if the company remains a net buyer; see power purchase agreements. Forward purchases of carbon allowances face the same test; see emissions allowances.

When should a company use the fair value option?

A company can designate an own-use contract at fair value through profit or loss at inception if doing so eliminates or significantly reduces an accounting mismatch, for example where it hedges the contract's price exposure with derivatives that are already at fair value. The election is irrevocable. It is useful for utilities that manage supply and hedging together but do not want to apply hedge accounting. See commodity hedging and own use.

How does US GAAP differ?

ASC 815's equivalent, the normal purchases and normal sales scope exception, is an election that must be documented for each contract, and similar tainting concepts apply. Under IFRS the exemption applies automatically when the conditions are met. See IFRS 9 hedge accounting and power and utilities accounting.

This guide is general information. It is not tax or legal advice for your situation.