Accounting Standard AASB 2025-1 Amendments to Australian Accounting Standards – Contracts Referencing Nature-dependent Electricity

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Explanatory Statement

Accounting Standard AASB 2025-1
Amendments to Australian Accounting Standards –
Contracts Referencing Nature-dependent Electricity

 

February 2025

 

EXPLANATORY STATEMENT

Standards Amended by AASB 2025-1

This Standard makes amendments to AASB 7 Financial Instruments: Disclosures (August 2015) and AASB 9 Financial Instruments (December 2014).

These amendments arise from the issuance of International Financial Reporting Standard Contracts Referencing Nature-dependent Electricity (Amendments to IFRS 9 and IFRS 7) by the International Accounting Standards Board (IASB) in December 2024.

Main Features of AASB 2025-1

Nature-dependent electricity contracts help entities to secure their electricity supply from sources such as wind and solar power. The amount of electricity generated under these contracts can vary based on uncontrollable factors such as weather conditions.

This Standard amends AASB 7 and AASB 9 to allow entities to better reflect these contracts in the financial statements. The amendments:

  1.                    clarify the application of the ‘own-use’ criteria to nature-dependent electricity contracts;
  2.                    permit hedge accounting if these contracts are used as hedging instruments; and
  3.                    add new disclosure requirements to enable users of financial statements to better understand the effect of these contracts on an entity’s financial performance and cash flows.

Application Date

This Standard applies to annual periods beginning on or after 1 January 2026, with earlier application permitted.

Marked-up Text

This Standard incorporates marked-up text to clearly identify the amendments to AASB 7 and AASB 9. All amendments are incorporated using clean text into the compilations of the pronouncements when they are prepared, based on the legal commencement date of the amendments.

Consultation Prior to Issuing this Standard

In May 2024, the IASB issued Exposure Draft ED/2024/3 Contracts for Renewable Electricity. The AASB issued the same proposals in Australia for public comment in Exposure Draft ED 330 Contracts for Renewable Electricity. Comments to the AASB were due by 21 June 2024.

The AASB made a submission to the IASB on ED/2024/3. The AASB’s submission supported the proposals overall, with recommendations for further clarification, suggestions for illustrative examples of the proposed hedge accounting requirements, and postponement of the effective date by one more year beyond that suggested by the IASB. The AASB’s submission was informed by feedback from targeted outreach activities, including consultation with the AASB Financial Instruments Project Advisory Panel, the AASB User Advisory Committee, financial statement preparers, auditors and professional bodies.

The IASB analysed the feedback it received on ED/2024/3 and decided to finalise the amendments after making some modifications, which satisfactorily addressed the AASB’s concerns. The modifications for the Standard included wording changes to improve clarity, clarification of the proposed additional disclosures and postponing the effective date to 1 January 2026, with earlier application permitted. The IASB also developed an illustrative example of applying the hedge accounting requirements.

The AASB considered and adopted the amendments made by the IASB to IFRS 7 and IFRS 9 in finalising AASB 2025‑1. The AASB set an effective date of annual periods beginning on or after 1 January 2026, with earlier application permitted, the same as the IASB’s effective date.

A Policy Impact Analysis has not been prepared in connection with the issue of AASB 2025-1 as the amendments made do not have a substantial direct or indirect impact on business or competition.

Legislative Features of Accounting Standards

Power to Make Amendments

Under subsection 33(3) of the Acts Interpretation Act 1901, where an Act confers a power to make, grant or issue any instrument of a legislative or administrative character (including rules, regulations or by-laws), the power shall be construed as including a power exercisable in the like manner and subject to the like conditions (if any) to repeal, rescind, revoke, amend, or vary any such instrument. Accordingly, the AASB has the power to amend the Accounting Standards that are made by the AASB as legislative instruments under the Corporations Act 2001.

References to Other AASB Standards

References in this Standard to the titles of other AASB Standards that are legislative instruments are to be construed as references to those other Standards as originally made and as amended from time to time and incorporate provisions of those Standards as in force from time to time.

Copyright

This Standard, like all Accounting Standards promulgated by the AASB, is published with Commonwealth of Australia copyright. Educational, commercial and other publishers are able to request the AASB for permission to reprint all or parts of this Standard, which is given without charge.

Exemption from Sunsetting

Accounting Standards promulgated by the AASB that are legislative instruments are exempt from the sunsetting provisions of the Legislation Act 2003 through section 12 of the Legislation (Exemptions and Other Matters) Regulation 2015 (Item 18(a)).

The AASB’s Australian Accounting Standards incorporate Standards set by the International Accounting Standards Board in respect of publicly accountable for-profit entities. The AASB’s Accounting Standards are exempt from sunsetting because a more stringent review process than sunsetting applies to the Standards. This review process ensures Australia’s Accounting Standards regime remains consistent with international Standards. Typically, the AASB Standards are revised at least once within a ten-year period, with most of the Standards subject to much more frequent revisions. Each revision follows the stringent review process (which includes the opportunity for public comment) in order to remain consistent with international Standards. It is very unlikely that any AASB Standard would not have been amended (or else considered for amendment) within a ten-year period through these review processes. Therefore, if it applied, a ten-year sunsetting regime would have very limited practical application to AASB Standards. Parliamentary oversight is retained whenever a Standard is replaced or amended since the Standards are disallowable instruments and subject to the normal tabling and scrutiny process as required by the Legislation Act 2003.

Statement of Compatibility with Human Rights

Prepared in accordance with Part 3 of the
Human Rights (Parliamentary Scrutiny) Act 2011

Accounting Standard AASB 2025-1
Amendments to Australian Accounting Standards –
Contracts Referencing Nature-dependent Electricity

Overview of the Accounting Standard

Nature-dependent electricity contracts help entities to secure their electricity supply from sources such as wind and solar power. The amount of electricity generated under these contracts can vary based on uncontrollable factors such as weather conditions.

This Standard amends AASB 7 and AASB 9 to allow entities to better reflect contracts referencing nature-dependent electricity in the financial statements. The amendments:

  1.                    clarify the application of the ‘own-use’ criteria to nature-dependent electricity contracts;
  2.                    permit hedge accounting if these contracts are used as hedging instruments; and
  3.                    add new disclosure requirements to enable users of financial statements to better understand the effect of these contracts on an entity’s financial performance and cash flows.

Human Rights Implications

This Standard is issued by the AASB in furtherance of the objective of facilitating the Australian economy. It does not diminish or limit any of the applicable human rights or freedoms, and thus does not raise any human rights issues.

Conclusion

This Standard is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

Overview

Accounting Standard AASB 2025-1, introduced in 2025, addresses the need to better account for nature-dependent electricity contracts, which help entities secure their electricity supply from renewable sources like wind and solar power. This amendment responds to the variability in electricity generation due to uncontrollable factors such as weather conditions. The Australian Accounting Standards Board (AASB), acting under the Corporations Act 2001, made these amendments to AASB 7 and AASB 9 to ensure entities can more accurately reflect these contracts in their financial statements. The policy objective is to enhance the clarity and usefulness of financial reporting by improving how these contracts are accounted for and disclosed, thus aiding stakeholders in understanding the financial implications of such contracts.

Scope and Application

The Accounting Standard AASB 2025-1, which amends Australian Accounting Standards to address contracts referencing nature-dependent electricity, applies to entities that enter into such contracts and prepare financial statements in accordance with Australian Accounting Standards. This includes for-profit entities that are publicly accountable as defined under the Corporations Act 2001. The Standard amends AASB 7 Financial Instruments: Disclosures and AASB 9 Financial Instruments to enhance the clarity and appropriateness of financial reporting for these specific types of contracts. The Standard's provisions allow entities to better reflect these contracts in their financial statements by clarifying the application of the 'own-use' criteria, permitting hedge accounting for these contracts, and introducing new disclosure requirements. These amendments are designed to improve the transparency and understandability of financial statements, thereby aiding stakeholders in assessing the financial performance and cash flows of entities that rely on nature-dependent electricity contracts. The Standard applies to annual periods beginning on or after 1 January 2026, with earlier application permitted. The AASB, as a legislative instrument maker under the Corporations Act 2001, has the power to amend Accounting Standards, and these amendments are incorporated into the compilations of the pronouncements when prepared based on the legal commencement date of the amendments. The AASB’s Accounting Standards are exempt from sunsetting provisions under the Legislation Act 2003, as they are subject to a more stringent review process, ensuring consistency with international Standards and parliamentary oversight.

Key Provisions

AASB 2025-1 (subsections 3 and 4) amends AASB 7 Financial Instruments: Disclosures (August 2015) and AASB 9 Financial Instruments (December 2014) to address the unique characteristics of nature-dependent electricity contracts, such as those for wind and solar power. These amendments allow entities to more accurately reflect such contracts in their financial statements, clarify the application of ‘own-use’ criteria, permit hedge accounting for these contracts, and introduce new disclosure requirements to provide users of financial statements with a clearer understanding of their impact on financial performance and cash flows. The standard is applicable to annual periods beginning on or after 1 January 2026, with earlier application being permitted. Entities are required to apply the amendments to their financial statements for the relevant periods, ensuring that they adequately disclose the nature and terms of their nature-dependent electricity contracts and any hedging activities associated with them. Under this standard, entities must ensure that their financial statements comply with the new requirements for nature-dependent electricity contracts. This involves clearly disclosing the terms and conditions of these contracts, the nature of the underlying assets, and any related hedging activities. Entities must also ensure that their financial statements reflect the impact of these contracts on their financial performance and cash flows. Additionally, entities must comply with the new disclosure requirements, providing detailed information about the contracts and their effects. The standard also requires entities to review their existing hedge accounting policies to determine if any nature-dependent electricity contracts qualify for hedge accounting under the new provisions. Failure to comply with the requirements of AASB 2025-1 may result in financial statements that do not accurately reflect the true nature and impact of nature-dependent electricity contracts. This could lead to misunderstandings by investors, creditors, and other stakeholders about the financial health and risks associated with these contracts. Additionally, entities may face scrutiny from regulators and potential legal consequences if their financial statements are found to be misleading or non-compliant with the standard. The Australian Accounting Standards Board (AASB) has the authority to take action against entities that do not comply with the new requirements, including issuing reprimands, fines, or other penalties as deemed appropriate. The maximum penalties for non-compliance with Australian Accounting Standards are not specified in the standard itself but can be significant, depending on the severity of the breach and the jurisdiction in which the entity operates.

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