Accountants Love Acronyms!

If you have spent any time talking to us, accountants, you know we love our acronyms – few examples being GAAP, IFRS and even the accounting firm names! We use acronyms so much, that the full names are sometimes forgotten. Yes, acronyms sound much cooler – ?working on FICE sounds like I am living in Miami working with Crockett and Tubbs (Miami Vice reference for those of you that don’t remember the 80’s), compared to Financial Instruments with the Characteristics of Equity which screams accounting nerd!

Speaking of accounting nerds, I have a favorite accounting acronym – PPA.??

PPA is like a solid utility infielder (something the Jays need) – it is versatile. Traditionally, it was used to refer to both Prior Period Adjustments and Purchase Price Allocations.? Lately, PPA is being used by accountants to refer to Power Purchase Arrangements. At the Accounting Standards Board (AcSB) , we have been discussing two of the three PPAs, which brings me to the actual subject of this post – Purchase Price Allocations and Power Purchase Arrangements.

Purchase Price Allocations

At our January AcSB meeting, we discussed a domestic (ASPE) project on Subsequent Measurement of Goodwill and Acquired Intangible Assets.? This project will consider providing optional relief from the recognition of intangible assets acquired in a business combination and bring back the amortization of goodwill.?

Providing relief from the recognition of intangible assets, would simplify and reduce the cost of performing a Purchase Price Allocation.? By not recognizing all or some of these intangible assets, there will be no need to determine the fair value of those intangible assets as they would be incorporated into goodwill, which is a residual.? This could significantly reduce preparation and assurance costs related to business combinations.? Re-introducing amortization of goodwill will not eliminate the need for impairment testing when indicators exist, which can also be costly. ?However, if goodwill is amortized the balance will reduce overtime and therefore reduce the frequency of the need to test for impairment.

This project is an example of considering cost vs. benefit, as we continue to hear that purchase price allocations and impairment testing are costly and, in many cases, provide limited benefit, due to how lenders consider goodwill and intangible assets when making credit decisions for private enterprises.

Power Purchase Arrangements

In January, I participated in a meeting of the International Accounting Standards Board (IASB) ’s Accounting Standards Advisory Forum (ASAF) to discuss Power Purchase Arrangements.

Power Purchase Arrangements are not new; however, they are becoming much more prevalent as companies make net-zero commitments and try to lock in renewable energy at a fixed price for long periods of time.? How these arrangements are structured can take various forms and, in many cases, will depend on how the electricity markets work, which will vary from jurisdiction to jurisdiction.? They can be physical (P-PPA), where the purchaser agrees to take delivery of the energy and any excess must be sold back into the market by the purchaser, or virtual (V-PPA), where the purchaser buys energy from the market at spot price and the contract is ultimately a pay fixed-receive floating energy swap.? Although contractually different, physical and virtual PPAs have similar economic outcomes. Under the current standards many P-PPAs and all V-PPAs will end up being accounted for as derivatives and neither will be eligible for hedge accounting.

The issue that has been raised with the IASB is that due to the long-term nature of these contracts and the fact that both price and volumes can fluctuate, derivative accounting results in significant fair value movements through profit and loss.? The IASB’s project is exploring whether amendments to IFRS 9 can be made to result in less P-PPAs being accounted for as derivatives, and if hedge accounting can be used for V-PPAs. ?If the proposals move forward as being discussed, they will result in economically similar arrangements being accounted for differently, which is currently not the case. However, the proposals would result in less volatility in the P&L.

The IASB is expected to issue an Exposure Draft in the second quarter of the year. PPAs are prevalent in Canada, especially V-PPAs.? As a result, we have connected several impacted Canadian companies with the IASB and are following this project very closely.

I am looking forward to hearing your thoughts on these projects in the comments below. And yes, don’t forget to mention what your favorite accounting acronym is!