Agenda decision: Does an entity’s right to use a battery under an offtake arrangement constitute a lease?

The IFRS Interpretations Committee (Committee) was asked whether an entity’s right to use a battery under an offtake arrangement constitutes a lease, specifically regarding whether a customer has the right to obtain substantially all the economic benefits from use of an identified asset (IFRS 16, paragraph B9(a)).

This article explains the fact pattern, analysis and conclusions from the Committee’s agenda decision.

Fact pattern

A battery owner and an electricity retailer are registered participants in a gross pool electricity market. The battery owner and the electricity retailer enter into a battery offtake arrangement whereby:

• The battery owner retains custody of the battery
• The battery owner is contractually obliged to operate the battery as per the electricity retailer’s instructions
• The offtake arrangement covers one hundred per cent of the capacity of the battery
• The battery cannot be substituted.

The electricity retailer’s instructions would typically specify whether and when the battery owner must charge and discharge the battery throughout the period of use (this could occur multiple times each day).

In a gross pool electricity market, settlement of electricity transactions requires a single registered participant (in this case, the battery operator) to transact with the market operator. Transactions under the offtake arrangement are settled as follows:

1. The electricity retailer pays a fixed amount to the battery owner over the contract period for the right to use the battery. This fixed payment reflects the battery’s size and period of use, and is payable regardless of whether the battery is charged or discharged.
2. The battery owner operates the battery according to the electricity retailer’s instructions by buying and selling electricity as needed. The battery owner then settles those transactions with the market operator. In accordance with the gross pool market structure, all transactions with the market operator occur at the spot price. The battery owner pays all resulting cash flows to (or receives all resulting cash flows from) the electricity retailer.
3. The battery owner and the electricity retailer periodically settle transactions in (a) and (b) on a net basis, in cash.

Assume that the battery is considered an identified asset because it cannot be substituted by the battery owner.

Also, assume that the electricity retailer has the right to direct the use of the battery throughout the period of use (paragraph B9(b) of IFRS 16).

Question put to the Committee

In determining whether it has a lease for the battery, the electricity retailer asked the Committee how it assesses whether throughout the period of use, it has the right to obtain substantially all of the economic benefits from using the identified asset (battery). 

Analysis

The electricity retailer must consider the terms and conditions of the contract, and all relevant facts and circumstances.

Paragraph B21 of IFRS 16 specifies that a customer can obtain economic benefits from using an asset, directly or indirectly, in many ways, such as by using, holding or sub-leasing the asset. The economic benefits from using an asset include its primary output and by-products (including potential cash flows derived from these items), and other economic benefits that could be realised from a commercial transaction with a third party.

The Committee observed that, in this fact pattern, the economic benefits of using the battery derive from its storage capability and capacity. That is, the battery is used to store, and then release, electricity—and not to produce it.

The Committee also observed that under the offtake arrangement, the electricity retailer derives the economic benefits from the battery storage because the electricity retailer has the exclusive right:

• To use the entire capacity of the battery throughout the period of use (for the duration of the arrangement), and
• To direct the battery owner as to whether, when and by how much to charge and discharge the battery.

Applying paragraph B21 of IFRS 16 to the fact pattern, the Committee concluded that the electricity retailer has the right to obtain substantially all the economic benefits from use of the battery.

Conclusion

The requirements in IFRS® Accounting Standards provide an adequate basis for the electricity retailer to determine whether it has the right to obtain substantially all the economic benefits from using the battery. Therefore, the Committee decided not to add a standard-setting project to the work plan.