IFRS 15 Revenue Recognition for Energy & Utilities

Step 1: Identify the Contract

IFRS 15.9–21All five criteria must be met for a contract to exist

Have the parties approved the contract and are committed to perform their respective obligations?

IFRS 15.9(a)

Approval can be written, oral, or implied by customary business practice. Commitment means the parties intend to enforce their respective rights. Consider whether there is a signed agreement, purchase order, or established pattern of dealing that evidences approval.

Can the entity identify each party's rights regarding the goods or services to be transferred?

IFRS 15.9(b)

The contract must establish enforceable rights for each party. This includes identifying what goods or services the entity will transfer and what the customer is entitled to receive. Even if terms are implicit or established by customary business practice, rights must be identifiable.

Can the entity identify the payment terms for the goods or services to be transferred?

IFRS 15.9(c)

Payment terms include the amount, timing, and form of consideration. The terms need not be explicitly stated if they can be determined from customary business practices or the contract's terms and conditions. Consider fixed prices, variable elements, milestone payments, and credit terms.

Does the contract have commercial substance — that is, the risk, timing, or amount of the entity's future cash flows is expected to change as a result of the contract?

IFRS 15.9(d)

A contract has commercial substance when it is expected to change the entity's future cash flows. This criterion prevents entities from recognising revenue on reciprocal exchanges of goods or services of similar nature and value (e.g., barter transactions between oil companies to fulfil demand in different locations). Most arm's-length commercial transactions have commercial substance.

Is it probable that the entity will collect the consideration to which it is entitled in exchange for the goods or services that will be transferred to the customer?

IFRS 15.9(e)

Assess the customer's ability and intention to pay. Consider the customer's credit history, financial condition, collateral or guarantees, and the entity's past experience with similar classes of customers. 'Probable' means more likely than not under IFRS. If the entity offers a price concession, assess collectability on the reduced (expected) amount, not the stated contract price (IFRS 15.9.A1).

Contract Combination Assessment

(Optional)

Are there multiple contracts with the same customer (or related parties) entered at or near the same time that should be combined?

Contract Modification Assessment

(Optional)

IFRS 15 Revenue Recognition for Energy & Utilities

IFRS 15 for Energy & Utilities presents distinctive challenges with long-term supply, variable pricing, and infrastructure services.

Series Guidance: Energy supply qualifies as a series under IFRS 15.22(b). Each unit is distinct, substantially the same, and transferred with the same pattern. The entire supply obligation is a single PO. The right-to-invoice expedient (IFRS 15.B16) is widely applicable.

Take-or-Pay: Minimum payments are fixed consideration. The variable element is consumption above the minimum. Determine whether the minimum relates to capacity reservation (stand-ready obligation recognised ratably) or is a floor on supply pricing.

Grid Connections: May be a separate PO if the customer can benefit independently. Over-time recognition under IFRS 15.35(c) is typical — no alternative use (connects specific premises) and right to payment.

Variable Consideration: Consumption-based pricing, index-linked prices, rebates, penalties. The variable consideration allocation exception (IFRS 15.84-86) allows allocation to specific periods.

Renewable Certificates: RECs/GOs bundled with supply need assessment — separate PO if separately tradeable and priced, combined if sold as 'green energy' product.

Common Audit Pitfalls:

Failure to apply series guidance when applicable.
Mischaracterising take-or-pay minimums.
Not identifying IFRS 16 lease components in certain PPAs.
Applying the royalty exception to non-IP arrangements.

Typical Contract Structures

Long-term supply agreements (5-20 years) with variable consumption-based pricing, fixed or indexed prices, take-or-pay provisions, capacity reservation, grid connection/infrastructure, metering, and increasingly, renewable certificates or carbon offsets.

Common Performance Obligations in Energy & Utilities

Energy supply Capacity reservation Grid connection Metering services Renewable energy certificates

Regulatory Context

Regulated tariffs may limit pricing discretion. Government subsidies for renewables may be IAS 20 rather than IFRS 15. Capacity market mechanisms require individual assessment.

Worked Example: Electricity Supply + Capacity Reservation + Grid Connection

PowerCo contracts with IndustrialCorp for 5 years: electricity at variable pool price (take-or-pay minimum 50,000 MWh/yr at $45/MWh), capacity reservation (15 MW, $500K/yr), and grid connection ($800K, 8-month build).

Step 1: Identify the Contract

Single PPA covering supply, capacity, and connection. All IFRS 15.9 criteria met. No IFRS 16 lease component (no specific generating asset controlled).

Step 2: Identify Performance Obligations

Three POs: (1) Electricity supply — series (IFRS 15.22(b)); (2) Capacity reservation — distinct stand-ready obligation; (3) Grid connection — distinct construction.

Step 3: Determine the Transaction Price

Supply minimum: $2.25M/year fixed, variable above minimum. As-invoiced expedient applies to variable portion. Capacity: $500K/year. Connection: $800K. No significant financing.

Step 4: Allocate the Transaction Price

Each PO is separately priced at approximately its SSP. Variable supply consideration allocated to delivery periods under IFRS 15.84-86.

Step 5: Recognise Revenue

Supply: over-time (IFRS 15.35(a)), right-to-invoice expedient. Capacity: straight-line $500K/year. Connection: over-time cost-to-cost during 8-month build under IFRS 15.35(c).

IFRS 15 Revenue Recognition Audit Toolkit — free PDF

Complete audit toolkit: IFRS 15 five-step decision flowchart poster, contract assessment template, PO identification checklist, SSP allocation worksheet, and industry-specific application notes.

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Frequently Asked Questions

Does series guidance apply to all energy contracts?

Usually yes. Each unit is distinct and substantially the same with the same transfer pattern. Exception: materially different supply types (firm vs interruptible) may warrant separate analysis.

How are take-or-pay minimums recognised?

Depends on substance. If for capacity (stand-ready), recognise ratably. If a floor on supply pricing, recognise as part of the supply PO as energy is delivered.

Are grid connection fees over-time or point-in-time?

Often over-time under IFRS 15.35(c) — no alternative use and right to payment. If no right to payment until completion, point-in-time at connection.

How are RECs/GOs accounted for?

Assess distinctness. If separately priced and tradeable, separate PO. If bundled as 'green energy' at a single price, may combine with supply.

Can the 'as-invoiced' expedient be used?

Yes, widely. IFRS 15.B16 applies when the invoiced amount corresponds directly to the value of energy delivered.

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