Pruet's MoBlog

Accounting for Power Purchase Agreements under US GAAP

A power purchase agreement, or PPA, is a contract between an electricity generator and a buyer, typically a utility or large commercial entity, to purchase electricity at a negotiated price for a defined period of time. PPAs are commonly used in renewable energy projects such as wind and solar power plants, where the generator is typically a third-party developer that sells the electricity to a buyer under a long-term contract.

When it comes to accounting for PPAs, US Generally Accepted Accounting Principles (GAAP) provides guidance on how companies should recognize, measure, and disclose these contracts in their financial statements. The accounting treatment depends on the specific terms and conditions of the PPA, including the delivery and payment terms, the length of the contract, and the nature of the assets and liabilities involved.

Here are some of the key accounting considerations for PPAs under US GAAP:

1. Classification: The first step is to determine whether the PPA should be classified as a derivative instrument or a sales-type lease. If the PPA meets the criteria for a derivative instrument, it should be accounted for at fair value with changes in fair value recognized in earnings. If it is a sales-type lease, the generator should recognize revenue for the sale of electricity and lease income over the term of the contract.

2. Revenue recognition: When a generator sells electricity under a PPA, it should recognize revenue when it transfers control of the electricity to the buyer. This typically occurs over time as the electricity is delivered, and revenue should be recognized based on the amount of electricity delivered and the contract price.

3. Asset and liability recognition: If the PPA is a sales-type lease, the generator should recognize a lease receivable and a leased asset on its balance sheet. If the PPA is a derivative instrument, the generator should recognize a derivative asset or liability on its balance sheet based on the fair value of the contract.

4. Disclosure: Companies should provide adequate disclosure in their financial statements regarding the nature and terms of their PPAs, including the length of the contract, the delivery and payment terms, and any significant risks and uncertainties related to the contract.

In conclusion, accounting for PPAs under US GAAP requires careful consideration of the specific terms and conditions of the contract, including classification, revenue recognition, asset and liability recognition, and disclosure requirements. Companies should work closely with their auditors and accounting advisors to ensure they are properly accounting for their PPAs in compliance with US GAAP.