Battery Energy Storage System Agreements Accounting Treatment: The 2026 IFRS and US GAAP Decision Framework

If your company has signed a battery energy storage system (BESS) offtake agreement, or is about to, the accounting classification question is no longer theoretical. In April 2026, the IASB ratified the IFRIC's finalised agenda decision on "Economic Benefits from Use of a Battery under an Offtake Arrangement", the first authoritative IFRS guidance specific to BESS contracts. This article gives you the complete decision framework for both IFRS and US GAAP, in plain English, in one place.

Key takeaway: Getting BESS accounting wrong means restatements, audit findings, and potential SEC comment letters. The April 2026 IFRIC agenda decision is the current authoritative endpoint for IFRS reporters, and it changes the analysis for many contracts that were previously classified as leases.

Why BESS Accounting Is Contested

BESS contracts do not fit neatly into any single accounting standard. Depending on their structure and the electricity market in which they operate, they may be leases (IFRS 16 / ASC 842), derivatives (IFRS 9 / ASC 815), executory service contracts, or financial tolling arrangements measured at fair value through profit or loss.

The IFRIC Staff Paper AP3 from September 2025 put it plainly: "We have recently encountered diverging accounting treatments regarding Battery Energy Storage System (BESS) agreements in gross pool electricity markets." That divergence prompted the Committee to act. Cumulative installed grid-scale battery storage in Europe exceeded 10 GW in 2024, with projections of a five- to eightfold increase over the next decade, so the stakes are material.

IFRS Accounting Standards apply in more than 140 jurisdictions, meaning the April 2026 agenda decision has global reach. US GAAP reporters, by contrast, have no BESS-specific standard and must work by analogy from ASC 842 and ASC 815, a significant and underappreciated gap.

Step 1: Physical or Virtual? The Threshold Question

Before any lease or derivative analysis, you must determine whether your BESS contract is a physical or virtual arrangement. PwC's 2026 In depth guidance is direct: "It is important to understand the nature of the contractual agreement, because the ultimate accounting might often depend on whether the arrangement is a physical BESS or a virtual BESS."

The key indicator of a physical contract is a direct contractual link between the actual purchases and sales of electricity to and from the battery and the cash flows paid to the capacity buyer. A virtual contract, by contrast, grants the buyer a right to a specified volume of notional capacity, with no obligation on the seller to physically store or dispatch matching electricity.

Virtual BESS contracts typically fall within the scope of IFRS 9 because the agreements are generally net-settled in cash and there is no sale or purchase of a non-financial item. The own-use exemption is not available for virtual BESS contracts. Full stop.

Step 2: Does the Physical Contract Contain a Lease? (IFRS 16 / ASC 842)

For physical BESS contracts, the primary question is whether the arrangement is or contains a lease. The analysis runs through three criteria under both IFRS 16 and ASC 842:

1. Is there an identified asset? In most BESS offtake agreements, the battery is explicitly referenced and cannot be substituted. This criterion is typically satisfied. But satisfying it does not mean there is a lease, a common and costly misreading.
2. Does the customer obtain substantially all the economic benefits from use of the asset? This is where most BESS contracts fail the lease test in gross pool markets.
3. Does the customer have the right to direct the use of the asset? For BESS, this raises an additional complication with no windfarm analogue (see below).

The Gross Pool Market Problem

Understanding gross pool mechanics is essential. In a gross pool electricity market (used in the US, Australia, Canada, Singapore, South Korea, and parts of the EU), all purchases and sales of electricity clear through a market operator. There is no bilateral physical delivery between generator and retailer. The market operator settles with each registered participant at spot prices.

For a BESS in a gross pool market, the battery owner is the registered market participant. The battery owner physically receives the electrons and settles financially with the pool. The retailer receives or pays variable cash flows to the battery owner via net settlement outside the electricity market. As the IFRIC submission explains: "Physical delivery of electricity can only occur in a net pool market. Therefore PPAs entered in gross pool markets are considered 'virtual PPAs' as the economic benefits can never be received by the electricity retailer, and as such, are considered derivatives." This principle carries directly into BESS offtake analysis.

The practical result: even where the battery is an identified asset that cannot be substituted, the capacity buyer (retailer) in a gross pool market typically cannot obtain substantially all the economic benefits from use of the battery. The economic benefits flow through the spot market to the battery owner, not to the retailer.

The BESS-Specific Wrinkle: Operator Discretion

A windfarm cannot control the wind. A battery operator can choose when to charge and discharge. This discretion creates a second, independent reason why a BESS offtake agreement in a gross pool market may fail the lease test: the battery owner's operational control over timing means the retailer may not have the right to direct the use of the asset, even if the economic benefits question were resolved in the retailer's favour.

The IFRIC submission explicitly flags this: the assessment "cannot occur in isolation of the 2021 IFRIC windfarm decision," but the battery's operational discretion is a distinct and additional analytical layer with no windfarm precedent.

IFRS 16 vs. ASC 842: The Key Difference

Under ASC 842, "substantially all" is deemed to represent 90%, a bright-line percentage absent from IFRS 16, which applies a qualitative standard. In practice, this means the US GAAP analysis may reach different conclusions than the IFRS analysis for structurally identical contracts.

A typical BESS offtake arrangement in a gross pool market involves a 10-year fixed-charge contract against a battery with an approximately 20-year economic useful life, meaning the contract covers roughly 50% of the asset's life. That alone does not determine the outcome, but it is a relevant data point in the economic benefits assessment.

Step 3: If Not a Lease, Is It a Derivative? (IFRS 9 / ASC 815)

If the lease analysis concludes there is no lease, the next question is whether the contract is a derivative. Under IFRS 9, a contract is a derivative if it meets three criteria:

1. Its value changes in response to an identifiable underlying (here, intraday power price spreads).
2. It requires no significant initial net investment.
3. It is settled at a future date.

For physical BESS contracts in gross pool markets that fail the lease test, and for all virtual BESS contracts, these criteria are typically met. The contract must then be measured at fair value through profit or loss (FVTPL) unless designated as a hedging instrument under IFRS 9.

The own-use exemption (which would allow the contract to be treated as an executory contract rather than a derivative) is not available in gross pool markets. Physical delivery to the retailer is structurally impossible in those markets, so the exemption's requirement for expected physical delivery cannot be satisfied.

Under US GAAP, the analysis follows ASC 815. The commodity contract scoping sequence is: lease (ASC 842) first, then derivative (ASC 815), then executory contract (ASC 606). The normal purchase and normal sale exception under ASC 815 is the US GAAP analogue of the IFRS 9 own-use exemption, and faces the same structural barrier in gross pool markets.

Financial Tolling Agreements: A Derivative by Design

A Financial Tolling Agreement (FTA) is a specific form of virtual BESS contract structured from the outset as a financial derivative. There is no physical delivery of electricity. The contract is cash-settled against the Optimal Dispatch Value (ODV): the theoretical value that an ideal battery would have generated by operating optimally in the spot market.

As EY's Financial Accounting Advisory Services analysis describes it: "Financial Tolling Agreements are turning battery storage into a sophisticated financial instrument, where the real value lies not in the energy produced, but in the optionality of the storage itself."

The asset owner receives a fixed periodic capacity fee and transfers the ODV to the buyer. EY confirms that "a storage FTA structured as a Virtual Battery Storage arrangement meets all three criteria required to qualify as a derivative" under IFRS 9 (and by analogy, ASC 815). Once classified as a derivative, the FTA must be measured at FVTPL at each reporting date.

Fair Valuing a BESS FTA: The Level 3 Challenge

This is where the accounting complexity becomes genuinely hard. The fair value of a BESS FTA at any reporting date is the difference between the present value of expected future ODVs receivable and the present value of future capacity fees payable.

Calculating the ODV for a past period is straightforward: given published hourly prices and the contractual technical constraints, the optimisation algorithm produces a unique outcome. The challenge is the balance sheet valuation, which requires projecting that same ODV forward. As EY notes: "The entire complexity of the instrument lies in that projection."

Key features of the Level 3 fair value exercise under IFRS 13 (and ASC 820 under US GAAP):

• Projection horizon: typically 5 to 15 years, and in some cases up to 25 years.
• Price granularity required: hourly or sub-hourly electricity price projections, because the value of storage depends on intraday price dispersion, not average price levels.
• Capacity fee modelling: inflation-linked adjustments, step-ups, and availability-linked adjustment mechanisms must be modelled separately.
• Unobservable inputs: multi-decade forward intraday price spreads are not observable in active markets, making this a Level 3 measurement with significant judgement.

FTA fair value disclosures under IFRS 13 (or ASC 820) must describe the valuation technique, the significant unobservable inputs, and the sensitivity of the fair value to changes in those inputs. Audit committees should expect detailed challenge on the price modelling assumptions.

The 2026 IFRIC Agenda Decision vs. the 2021 Windfarm Decision

The 2021 IFRIC windfarm agenda decision is the mandatory analytical starting point for any BESS lease assessment under IFRS 16. But the two decisions are not identical, and applying the windfarm decision mechanically to BESS contracts without accounting for the differences is one of the most common errors practitioners are making right now.

The additional analytical layer for BESS is the battery operator's discretion over charging and discharging timing. A windfarm cannot control the wind, so the question of who directs the use of the asset is less contested. For a battery, the owner's operational discretion is a separate and independent ground on which the retailer may fail the "right to direct use" criterion, even if the economic benefits question were somehow resolved in the retailer's favour.

Also important: BESS arrangements are explicitly excluded from the IASB's ongoing Nature Dependent Electricity contracts project. Practitioners should not expect that project to resolve BESS-specific questions.

Developer/Owner-Side Accounting: PP&E or Project Asset?

The accounting question is not just for the capacity buyer. Battery owners and developers face their own classification decision under US GAAP.

As disclosed in a 2026 SEC EDGAR filing: "Solar power and battery energy storage projects are classified as project assets unless the Company intends to retain and operate them to generate electricity." Project assets are treated as inventory, not PP&E. The distinction has significant income statement and balance sheet implications:

• Project asset (inventory): costs flow through cost of goods sold when the project is sold; no depreciation.
• PP&E: costs are capitalised and depreciated over the asset's useful life; impairment tested under ASC 360.

For solar-plus-storage developers, this classification is not always obvious at inception, particularly where the entity has a mixed strategy of selling some projects and retaining others. A separate SEC EDGAR filing (CIK 874761) confirms that at least one public company accounts for stand-alone BESS projects as lessor operating leases under ASC 842-30, treating the battery as PP&E retained for lease.

The Business Purpose Dimension

PwC's 2026 framework identifies five distinct business purposes for BESS contracts: speculation/trading, financial or risk intermediation, generator hedging, energy retailer cost reduction, and manufacturer electricity cost management. The accounting analysis may differ depending on the entity's purpose, even for structurally identical contracts. A speculator entering a BESS contract for trading will almost certainly be in FVTPL territory. A manufacturer using a BESS to manage its own electricity consumption may have a stronger argument for executory contract treatment in a net pool market.

Document your business purpose clearly in your technical accounting memo. Auditors and SEC reviewers will ask.

Retrospective Implications of the April 2026 IFRIC Decision

Entities that previously classified BESS contracts as leases under IFRS 16, or that applied the own-use exemption under IFRS 9 to contracts in gross pool markets, should reassess those treatments in light of the April 2026 agenda decision. IFRIC agenda decisions are not new standards, but they represent the Committee's authoritative view of how existing standards apply. Continued application of a treatment inconsistent with an agenda decision requires robust justification and, in practice, creates significant audit risk.

For US GAAP reporters, the gap is different: there is no equivalent BESS-specific guidance, meaning prior treatments may be defensible by analogy but are not protected by any authoritative interpretation. The divergence between IFRS and US GAAP on this topic is itself a material disclosure consideration for dual reporters.

Common Misclassifications Auditors Are Flagging

Based on the diverging treatments documented in the IFRIC submission and Big-4 guidance, these are the red flags most likely to generate audit findings or SEC comment letters:

1. Treating an identified asset as automatically creating a lease. The battery cannot be substituted, so there is an identified asset, but that is only the first of three criteria. Many preparers stop there.
2. Applying the own-use exemption in a gross pool market. Physical delivery to the retailer is structurally impossible in gross pool markets. The exemption does not apply.
3. Misapplying the 2021 windfarm decision without accounting for battery discretion. The battery owner's control over charge/discharge timing is a distinct analytical layer the windfarm decision does not address.
4. Failing to classify a Financial Tolling Agreement as a derivative at all. FTAs are derivatives by design. Not recognising them as such, or recognising them but not fair-valuing them at each reporting date, is a measurement error.
5. Using Level 2 inputs for FTA fair value when the projection horizon requires Level 3. Intraday price spreads over 5 to 25-year horizons are not observable. Level 3 classification and the associated disclosure requirements apply.
6. Inconsistent developer-side classification. Applying PP&E treatment to projects intended for sale, or inventory treatment to projects intended for retention and operation, creates income statement distortions.
7. Not revisiting prior-period treatments after the April 2026 IFRIC decision. Audit committees that are unaware of the agenda decision may be sitting on prior-period misclassifications.

Disclosure Requirements

Once you have determined the correct classification, the disclosure obligations are substantial:

• If classified as a lease (IFRS 16 / ASC 842): right-of-use asset and lease liability on the balance sheet; maturity analysis of lease liabilities; description of significant judgements in the lease assessment.
• If classified as a derivative (IFRS 9 / ASC 815): fair value disclosure under IFRS 13 / ASC 820, including the fair value hierarchy level, valuation technique, and significant unobservable inputs; sensitivity analysis for Level 3 measurements; risk management disclosures under IFRS 7 / ASC 815.
• If classified as an FTA at FVTPL: full Level 3 roll-forward; description of the ODV projection methodology; key assumptions (price shape, battery degradation, discount rate).
• In all cases: description of the nature and terms of the BESS arrangement; the accounting policy applied; and the judgements made in reaching the classification conclusion.

For technical accounting memo best practices that will survive audit and SEC review, see How to Draft a Technical Accounting Memo That Survives Audit and SEC Review.

FAQ

Does the April 2026 IFRIC agenda decision apply to all BESS contracts? The decision addresses BESS offtake arrangements in gross pool electricity markets specifically. Net pool market contracts require a separate analysis, and the own-use exemption may be available in those markets where physical delivery to the retailer is structurally possible.

Can a BESS offtake agreement ever be a lease under IFRS 16? Yes, in theory. In a net pool market where the retailer is the registered market participant and has genuine operational control over the battery's charge/discharge decisions, the lease criteria could be satisfied. In gross pool markets, this outcome is very unlikely based on the April 2026 IFRIC guidance.

What is the difference between a BESS FTA and a standard BESS offtake agreement? A standard BESS offtake agreement (BOA) is typically a physical contract tied to an identified battery, with cash flows linked to actual battery operations. An FTA is a virtual contract cash-settled against the Optimal Dispatch Value of a notional battery. The FTA is a derivative by design; the BOA requires a full lease and derivative scoping analysis.

Under US GAAP, what happens if the BESS contract is not a lease or a derivative? The residual category is an executory contract, typically accounted for under ASC 606 as a service arrangement. Variable payments are recognised as incurred; no balance sheet asset or liability is recorded (other than any prepayments or accruals).

How does the BESS accounting question interact with the IASB's Nature Dependent Electricity contracts project? BESS arrangements are explicitly excluded from the scope of that project. Practitioners should not expect any guidance from that project to resolve BESS-specific accounting questions.

Should we get a Big-4 technical accounting opinion before signing a new BESS contract? For any material BESS contract, yes. The April 2026 IFRIC agenda decision has clarified the IFRS framework, but US GAAP analysis remains fragmented, and the facts-and-circumstances nature of the assessment means the contract structure and market context both matter. A pre-signing technical accounting analysis can also influence contract drafting to achieve the desired accounting outcome.