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The accounting for commodity contracts brings together a breadth of accounting standards—leases, derivatives, revenue recognition, and consolidation—which are individually among the most complicated areas of accounting. Add their interaction, and it is understandable that commodity contract accounting is one of the most difficult areas of accounting for utilities and power companies. Figure 1-1 outlines a recommended framework for evaluating commodity contracts:
Figure 1-1
Recommended framework for accounting for commodity contracts
This general framework for the evaluation of commodity contracts provides an overall approach to performing the analysis. Reporting entities should apply the framework and consider all applicable guidance, even though the accounting for a particular contract may appear to be straightforward. For example, even a short-term power purchase agreement may include components that require application of different accounting models if (1) more than one product is being delivered under the contract, (2) the contract includes unique pricing elements, and/or (3) the contract meets the definition of a lease. Further, because of the complex interaction of the relevant guidance, the order of the analysis is a central component of accounting for commodity contracts.
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