Thursday, May 5, 2011
Power purchase agreements (PPAs), Other Deal Financing Tools will Weigh on Balance Sheets
The Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) have amended their accounting standards, writes BusinessTimes. And the new rules are expected to impact the way energy deals function. Two of the most popular financing arrangements in the industry, sale leasebacks and power purchase agreements (PPAs), would be hit the hardest by these changes, according to analysis at NREL.gov.
PPAs, one area to see significant impact with the changes, are currently treated as service contracts, but that would be reclassified. Under the new standards, NREL said, “…a normal commercial PPA with the vast majority of energy fed to the host would be classified as leases. PPAs, treated as leases, would be reported on a company’s balance sheet, removing one of its major incentives for hosts: buying the electricity and outsourcing the hassle of owning a solar system.”
The other area caught up in the changes is the use of a sale leaseback, a common financing route used to circumvent the burden of a capital lease. According to NREL, “currently, there is a difference between an operating lease and a capital lease. In an operating lease, the lessee has the right to use an asset and not assume the responsibility of ownership. Because of this lack of responsibility, the lessee does not have to put the asset on its balance sheet.”
According to Forbes.com, at the moment businesses are only required to include capital leases as assets on their balance sheets. The new rules change that, and would require all companies to list all lease transactions as assets and liabilities on their balance sheets. This requirement could deter energy-efficiency investments for developers, companies and non-profits by souring the “off-the-books” benefits of sale leasebacks, Forbes said.
Although the financial mechanics of these transactions will remain unchanged, companies who pursue energy efficiency or clean energy will have heavier balance sheets and risk being perceived as having higher leverage than they otherwise would, Forbes said. This could make debt more expensive for companies who perform lease transactions.
As well, writes Forbes, heavier balance sheets will lead to higher tax exposure, more extensive disclosure requirements and steeper annual accounting costs.
FASB and IASB are still receiving feedback from industry. The groups have a financial asset and financial liability round-table meeting in Singapore on Friday and another in Norwalk, Conn., on May 9.