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Application of NPNS: Scope Exception to Certain Electricity Contracts within Nodal Energy Market

The FASB issued an Accounting Standards Update, effective August 10, 2015, that specifically deals with the ability of entities to elect the normal purchase normal sales (NPNS) scope exception when the contract for the purchase or sale of electricity on a forward basis is delivered to a nodal energy market orimgres transmitted through a nodal energy market.

The NPNS scope exception allows entities to treat certain contracts that qualify as derivatives as contracts that do NOT require recognition at fair value. NPNS is available to those entities purchasing or selling a commodity that will be delivered in quantities that are expected to be used or sold over a reasonable period of time in the normal course of business. Physical delivery is a key component of the scope exception. There has been diversity in practice in determining whether electricity contracts delivered or passing through a nodal energy market qualify for NPNS. The amendment defines a nodal energy market as one that “is an interconnected electricity grid operated by an independent system operator with established price points at each node or hub location.”

The amendment, effective immediately, specifies that transmission through or delivery to a location within a nodal energy market is NOT considered net settled. If the transactions meet other NPNS requirements they now qualify for the NPNS scope exception. The amendment should be applied prospectively.

To see the amendment in full, follow the link: http://www.fasb.org/jsp/FASB/Document_C/DocumentPage?cid=1176166264424&acceptedDisclaimer=true.