FASB Flash Report - September 2015
FASB Issues ASU to Provide Guidance on Application of the Normal Purchases and Normal Sales Scope Exception to Certain Electricity Contracts Within Nodal Energy Markets
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The FASB recently issued ASU 2015-13 which specifies that the use of locational marginal pricing for certain contracts for the purchase or sale of electricity on a forward basis utilizing a nodal energy market does not, by itself, cause the contract to fail the physical delivery criterion of the normal purchases and normal sales elective scope exception in Topic 815. The ASU is effective upon issuance and is available here
Certain forward contracts for the purchase or sale of electricity in nodal energy markets1
whereby parties incur locational marginal pricing charges or credits (“LMP”) for the transmission of that electricity often meet the definition of a derivative. Topic 815, Derivatives and Hedging, requires that a derivative contract be recognized at fair value unless the contract qualifies for a scope exception. On this point, the normal purchases and normal sales (“NPNS”) scope exception, which includes a physical delivery criterion, can be elected. Prior to the ASU, U.S. GAAP did not contain specific guidance about whether the use of LMP by an independent system operator results in net settlement (i.e. contract fails the physical delivery criterion of the NPNS scope exception), causing diversity in practice.
The ASU specifies that the use of LMP by an independent system operator does not constitute net settlement of a contract for the purchase or sale of electricity on a forward basis that necessitates transmission through, or delivery to a location within, a nodal energy market, even in scenarios in which legal title to the associated electricity is conveyed to the independent service operator during transmission. Therefore, if all of the other criteria of the NPNS scope exception are met, an entity may elect to designate the contract as a normal purchase or normal sale.
Effective Date and Transition
The amendments became effective upon issuance and should be applied prospectively. An entity will have the ability to designate qualifying contracts that are entered into on or after the effective date of the ASU as NPNS. Because an entity may elect the NPNS scope exception at contract inception or at a later date, it also will be able to designate qualifying contracts entered into before the effective date as NPNS, but only prospectively.
For questions related to matters discussed above, please contact Gautam Goswami
, Adam Brown
or Chris Smith
1 A nodal energy market is an interconnected electricity grid operated by an independent system operator with established price points at each node or hub location.