Accounting Overhaul to Stabilize MSME Balance Sheets Amid Green Transition
In a significant regulatory move, India's accounting authorities have approved reforms that will protect corporate financial statements from the unpredictable nature of renewable energy generation. The National Financial Reporting Authority (NFRA) and the Institute of Chartered Accountants of India (ICAI) have addressed a critical issue that has long troubled industrial power consumers transitioning to green energy sources.
Ending Financial Instrument Treatment for Green Power Contracts
The core reform involves amendments to accounting standards Ind AS 107 and Ind AS 109, which previously treated Power Purchase Agreements (PPAs) for renewable energy as financial instruments. This classification required companies to mark these contracts to market value each quarter, creating artificial volatility in profit-and-loss statements due to the inherent unpredictability of solar and wind power generation.
Under the new framework, green power purchase contracts will no longer be classified as financial contracts when the buyer's annual power consumption exceeds the amount sold back to the grid. This change recognizes the fundamental difference between genuine energy consumption and speculative trading activities.
Alignment with Global Standards and Enhanced Disclosure
The regulatory shift brings Indian accounting practices in line with International Financial Reporting Standards (IFRS), creating greater consistency for multinational corporations and exporters. Instead of quarterly fair-value reassessments, companies will now provide detailed disclosures in their "notes to accounts" section, transparently reporting:
- Total power volumes purchased from renewable sources
- Amounts sold back to the grid
- The nature of their renewable energy agreements
Charanjot Singh Nanda, president of ICAI, emphasized that the amendments aim to reflect the "economic substance of renewable PPAs" while ensuring meaningful financial disclosures without creating unwarranted statement volatility.
Major Relief for MSME Sector
The reform is particularly significant for India's Micro, Small, and Medium Enterprises (MSMEs), which account for approximately 45% of the country's total exports. Many MSMEs are transitioning to renewable energy to comply with international regulations like the European Union's Carbon Border Adjustment Mechanism (CBAM) and similar measures being developed by the United States, Norway, Taiwan, Canada, and Australia.
Vinod Kumar, president of the India SME Forum, highlighted the multiple benefits for smaller businesses:
- Elimination of artificial profit-and-loss volatility linked to renewable PPAs
- Reduced audit and compliance complexity
- Improved credit profiles with financial institutions
- Greater confidence to enter long-term solar and wind power agreements
"By removing balance-sheet uncertainty, the reform enables MSMEs to pursue decarbonization without compromising financial stability," Kumar stated, noting that this will accelerate clean energy adoption across the sector.
Broader Implications for India's Green Transition
Experts believe the accounting changes will have far-reaching consequences for India's renewable energy landscape. Samir Malik, partner at Grant Thornton Bharat, explained that the amendment addresses practical challenges arising from modern renewable energy arrangements while aligning Indian standards with global best practices.
The regulatory clarity is expected to:
- Boost demand for rooftop solar installations
- Encourage group captive renewable projects
- Promote open-access renewable energy procurement
- Support India's national climate commitments
- Enhance MSME competitiveness in global markets
The revised norms, approved at a January 14 meeting and proposed to take effect from April 1, 2026, represent a strategic intervention by accounting regulators to support India's green energy transition while maintaining financial stability for businesses, particularly the crucial MSME sector that forms the backbone of the Indian economy.
