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Utilities and power companies frequently use derivative contracts in managing their businesses. Despite the fact that ASC 815 has been in effect for over 15 years, reporting entities continue to face difficulty in application given the complexity of the guidance and continued evolution of commodity derivatives in the marketplace. Compounding these issues, utilities and power companies often apply derivative scope exceptions or hedge accounting to minimize the income statement volatility that arises from recognizing derivative instruments at fair value.
This chapter provides guidance on specific issues associated with commodity contracts commonly used by utilities and power companies. Topics discussed include:
  • Evaluating whether a commodity contract meets the definition of a derivative
  • Applying scope exceptions, including the normal purchases and normal sales scope exception specific to power contracts
  • Determining when cash flow hedge accounting can be applied to forecasted purchase or sale transactions, along with maintaining ongoing compliance
  • Matters to consider in accounting for specific types of commodity contracts
This chapter supplements the PwC Derivative instruments and hedging activities guide. It does not address all aspects of the guidance in ASC 815; rather, it focuses on derivative and hedging issues unique to the utility and power industry. See DH for additional information.
In addition, this chapter should be read in connection with UP 1, which discusses the overall evaluation framework applicable to commodity contracts. This chapter focuses on the derivative assessment, assuming the contracts discussed do not contain a lease. See UP 2 for information on evaluating whether a contract contains a lease.

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