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Large-Scale Renewables Aggregation Guidance

Review Accounting Considerations

At this stage, individual buyers should consider what types of accounting treatments your organization is open to (e.g., accrual accounting or others). This is most important for corporate or nonprofit buyers that use FASB.

The video below provides an overview of accounting considerations to evaluate at this stage.

PPA contract terms and language will determine which accounting method needs to be used. Local governments and public institutions that use GASB accounting have simpler accounting rules for PPAs than corporations or institutions that use FASB accounting. Buyer groups will need to come to alignment early on about accounting considerations and associated contract language because the same contract language could result in different accounting treatment for government and corporate buyers.

Local governments, companies, and other organizations typically prefer to structure PPAs to use accrual accounting as opposed to other potential frameworks (e.g., lease or derivative accounting), as this approach is the simplest and will not impact an organization’s balance sheet.

For both physical and virtual PPAs, local governments and public institutions are exempt from many of the complicated accounting requirements that apply to corporations, including variable interest entity, lease, and derivative accounting. This makes it easy for aggregation groups consisting solely of government and public entities to use accrual accounting. The reasons these types of accounting requirements don’t apply are as follows:

  • Variable interest entity (VIE) consolidation accounting:

    Variable interest entities are not used in GASB.

  • Lease accounting:

    Lease accounting is not triggered by government electricity purchases. Physical PPAs are excluded from leases in GASB. Virtual PPAs typically do not provide a city with control over the asset, so they are not considered leases.

  • Derivative accounting:

    A normal purchases and normal sales exception applies to physical PPAs and virtual PPAs.

However, aggregation groups that include corporations may need to structure their agreements carefully to avoid triggering VIE, lease, and derivative accounting under the Financial Accounting Standards Board. Corporations will typically want to do the following:

  • Avoid VIE consolidation accounting

    by purchasing less than 50 percent of a project’s output or by ensuring that the seller retains the right to control the facility.

  • Avoid lease accounting

    by ensuring that they purchase only a portion (i.e., less than 90 percent) of the total output from the facility.

  • Avoid derivative accounting

    by purchasing a percentage, rather than a fixed amount, of output. This is often accomplished by buyers agreeing to purchase the energy generated by a specific number of megawatts in lieu of contracting for a predetermined number of megawatt-hours per year (e.g., purchasing the output of 10 MW, not 90,000 MWh per year). Corporations can opt into the Normal Purchases Normal Sales exception for physical PPAs.

Even if a group does not initially include corporations, it should still be mindful of these corporate accounting barriers if participants are open to inviting corporations to join later.