The Financial Accounting Standards Board (FASB) released a new update that aims to simplify the rules surrounding electricity contracts within nodal energy markets. Formally titled "Accounting Standards Update 2015-13—Derivatives and Hedging (Topic 815): Normal Purchases and Normal Sales Scope Exception for Certain Electricity Contracts within Nodal Energy Markets," the update was formally released on Aug. 10. 

Under the current rules, derivative contracts need to be recognized at fair value unless the contract qualifies for a scope exception, one of which is in the case of a contract that provides for the sale or purchase of something not a financial or derivative instrument that's expected to be used or sold in the normal course of business. While there are two sets of tests that can be used to determine whether this exception should be used, both say the good must be physically delivered. The FASB said that this raised questions over whether the purchase or sale of electricity in an interconnected grid with established price points at each hub location applies under this exception.

In response, the update says that the delivery of electricity can meet the physical delivery requirement, and thus qualify for the exception, even in situations where the legal title to the electricity is transferred to an independent system operator within this grid during transmission. 

The FASB said "the amendments in the Update are effective upon issuance and should be applied prospectively. Therefore, an entity will have the ability to designate on or after the date of issuance any qualifying contracts as normal purchases or normal sales."