Solar PPA Accounting Under Ind AS 116: A Factory CFO Guide

A solar power purchase agreement (PPA) is not automatically a lease under Ind AS 116. At inception, the customer assesses whether the agreement conveys control of an identified asset for a period in exchange for consideration. The analysis turns on the asset, substitution rights, economic benefits and who directs use—not labels such as “PPA,” “RESCO” or “energy services agreement.”

Key Takeaways

• First determine whether there is an identified asset, explicitly or implicitly specified.
• A supplier’s substantive right to substitute the asset can defeat identification; a merely protective or impractical right may not.
• The customer must obtain substantially all economic benefits and direct use throughout the period.
• If a lease exists, a lessee generally recognises a right-of-use (ROU) asset and lease liability at commencement, subject to applicable exemptions.
• Accounting does not decide legal title, tax ownership, GST treatment or electricity-regulatory rights.
• Commercial teams should read this with the solar PPA agreement guide.

What question does Ind AS 116 ask?

Ind AS 116 asks whether the contract conveys control over the use of an identified asset for a period of time in exchange for consideration. This embedded-lease test can apply even when the contract primarily appears to buy electricity. A factory must evaluate the contract and relevant facts together.

A “yes” on asset identification alone is insufficient. Both the economic-benefits and right-to-direct-use limbs must be satisfied.

Is there an identified solar asset?

Can the asset be explicitly or implicitly specified?

An on-site PPA naming the plant, meter, capacity and premises can identify an asset. An off-site PPA may specify a project or block. A plant can be implicitly specified when the supplier has no practical alternative for fulfilment.

Is the supplier’s substitution right substantive?

A substitution right is substantive when the supplier has the practical ability to substitute an alternative asset throughout the period and would benefit economically from doing so. They matter. A contractual sentence allowing substitution is not decisive if interconnection, permits, roof access, dedicated wiring or cost make substitution unrealistic.

Rights used only after breakdown, to protect performance, or after a future event may be protective rather than substantive. If the customer cannot readily determine whether the supplier’s right is substantive, Ind AS 116 contains a presumption relevant to that uncertainty; the finance team should apply the exact standard with its auditor.

Who obtains the economic benefits from use?

Economic benefits include primary output and potential by-products or other benefits from using the asset within the defined scope. For solar, consider electricity, renewable-energy attributes, certificates, incentives, export proceeds and other commercial products where relevant.

A customer taking all metered output from a dedicated rooftop plant may receive substantially all economic benefits without legal ownership. Document who owns or may sell renewable attributes because electricity consumption and attribute ownership can differ.

Who directs how and for what purpose the asset is used?

Control requires the right to direct use throughout the period. Ask who makes the relevant decisions that most significantly affect economic benefits. Depending on plant design and regulatory constraints, decisions may include whether, when and how much to generate, where output goes, operating protocols, expansion or repowering.

Solar generation is weather-driven, so day-to-day dispatch may be predetermined. Ind AS 116 addresses cases in which relevant decisions are predetermined. The customer may still direct use if it has the right to operate the asset without the supplier changing those instructions, or if it designed the asset in a way that predetermined how and for what purpose it will be used throughout the period.

What accounting follows if the PPA contains a lease?

At commencement, a lessee generally recognises an ROU asset and lease liability. The liability is initially the present value of lease payments not paid at that date, discounted using the interest rate implicit in the lease if readily determinable; otherwise the lessee’s incremental borrowing rate is used. The ROU asset includes specified components such as the initial liability, certain payments, initial direct costs and restoration estimates, less incentives, as applicable.

Subsequently, the liability usually increases for interest and decreases for payments, with remeasurement in prescribed circumstances. The ROU asset is generally depreciated and tested under applicable impairment requirements. Presentation and disclosure differ from treating all PPA charges as an operating electricity expense.

How are energy payments separated?

A contract may contain lease and non-lease components, such as operation and maintenance or electricity-related services. Allocate consideration under Ind AS 116’s rules unless an available practical expedient is elected for the relevant class of underlying asset. Variable payments require careful classification: some enter initial measurement, while others are recognised when the triggering event occurs.

“OPEX model” is not an accounting conclusion.

What if the arrangement does not contain a lease?

Account for the agreement under the other applicable Ind AS requirements and the entity’s accounting policies. Electricity expense may be recognised as supplied, but minimum payments, derivatives, executory-contract considerations, onerous obligations or other features may require separate analysis. Do not jump from “not a lease” to “simple monthly expense” without reviewing the whole arrangement.

Which PPA clauses should finance diligence before signing?

Create an accounting memorandum while terms are negotiable. It should attach the executed evidence and address:

1. plant identity, site, capacity and dedicated interconnection;
2. supplier substitution ability, cost and economic incentive;
3. allocation of output, deemed generation, exports and attributes;
4. design decisions and rights affecting operating purpose;
5. term, renewal, purchase, termination and relocation options;
6. fixed, minimum, capacity and variable payment components;
7. curtailment, force majeure and change-in-law consequences;
8. O&M scope and stand-alone price support;
9. roof restoration, decommissioning and handback duties;
10. modification process and required accounting reassessment.

How should a CFO model the balance-sheet effect?

Before approval, run both lease and service-accounting views. Estimate commencement-date liability, annual interest, ROU depreciation, current/non-current classification and covenant metrics. Compare EBITDA, finance costs, cash-flow presentation and net debt definitions under loan documents.

For illustration only, five annual fixed payments of ₹20 lakh discounted at 9% have a present value of approximately ₹77.8 lakh when paid at each year-end. Actual measurement depends on payment timing, enforceable term, variable components and the supportable discount rate. This is not a rate recommendation.

What legal and tax caveats remain?

An Ind AS lease can exist without legal ownership transferring. Conversely, ownership language does not establish accounting control. Land and roof rights, electricity law, open-access approvals, captive rules, stamp duty, GST, withholding and income-tax depreciation follow their own frameworks.

Accounting conclusions are entity- and contract-specific and require professional judgement. This guide is not accounting, tax or legal advice. Use the notified Ind AS text applicable to the reporting period and involve the statutory auditor early.

FAQ

Is every rooftop RESCO PPA a lease?

No. A dedicated asset may make identification more likely, but substitution, economic benefits and direction must all be analysed.

Does a per-kWh tariff prevent lease accounting?

No. Variable consideration does not by itself prevent a contract from containing a lease. Payment classification affects measurement after the lease conclusion is reached.

Do RECs decide who controls the plant?

No. Renewable attributes are relevant to economic benefits, but the complete control test also requires an identified asset and the right to direct use.

Can the conclusion change after signing?

Reassessment is limited, but a substantive contract modification can require a new analysis and modification accounting. Preserve approvals and effective dates.

Does recognising an ROU asset give the factory tax ownership?

No. ROU recognition is an accounting result. Legal title, GST ITC and income-tax ownership are separate determinations.

Sources

• India Code: Companies (Indian Accounting Standards) Amendment Rules, 2019, including Ind AS 116
• Ministry of Corporate Affairs: Accounting Standards e-book portal

Engage the statutory auditor and qualified legal and tax advisers on the executed PPA and current requirements.