FASB issued guidance that clarifies whether certain electricity contracts within nodal energy markets qualify for a scope exception to derivatives and hedging guidance.
The guidance is published in Accounting Standards Update (ASU) No. 2015-13, Derivatives and Hedging (Topic 815): Application of the Normal Purchases and Normal Sales Scope Exception to Certain Electricity Contracts Within Nodal Energy Markets (a consensus of the Emerging Issues Task Force).
The amendments in ASU No. 2015-13 apply to entities that enter into certain contracts for the purchase or sale of electricity on a forward basis and arrange for the electricity to be transmitted or delivered.
GAAP requires that a derivative contract be recognized at fair value unless the contract qualifies for a scope exception. The amendments describe the conditions under which certain electricity contracts qualify for an exception known as the normal purchases and normal sales scope exception.
The new guidance, issued Monday, is designed to resolve diversity in practice resulting from uncertainty about whether certain electricity contracts qualify for the scope exception. The new requirements take effect immediately.
—Ken Tysiac (email@example.com) is a JofA editorial director.