ACCOUNTING FOR BUILD-OPERATE-TRANSFER (BOT)

Related Standards:

 INTERNATIONAL FINANCIAL REPORTING INTERPRETATIONS COMMITTEE (IFRIC)

Interpretation 12 - SERVICE CONCESSION ARRANGEMENTS
 PFRS 15 REVENUE FROM CONTRACT WITH CUSTOMERS
 STANDARDS INTERPRETATIONS COMMITTEE (SIC) Interpretation 29 SERVICE
CONCESSION ARRANGEMENTS: DISCLOSURES
 SECTION 34 of the PFRS for SME

Under a BOT arrangement, the construction of a new infrastructure or the development or

maintenance of an existing infrastructure is outsourced from private companies ( called the
“OPERATORS”) through competitive bidding or direct negotiation.

The “OPERATOR” awarded with BOT contract is allowed to finance the construction,
development or maintenance of the infrastructure and commercially operate it for a fixed* period of
time sufficient for him to earn back the capital he invested as well as collect profit. After which the
“OPERATOR” TRANSFER THE INFRASTRUCTURE to the government without further compensation.

* Under the Philippine Laws, the fixed term shall not exceed 50 years and, in case of an infrastructure
or development facility whose operation requires a public utility franchise, the proponent must be
Filipino or, if a corporation, must be duly registered with the Securities and Exchange Commission and
owned up to at least 60% by Filipino.

Other terms for BOT ARRANGEMENTS are:

1. SERVICE CONCESSION ARRANGEMENT
2. REHABILITATE-OPERATE-TRANSFER
3. PUBLIC -TO- PRIVATE SERVICE CONCESSION
4. PRIVATE-PUBLIC PARTNERSHIP

EXAMPLES:

 MRT3 (between DOTC with Metro Rail Transit Corporation) in year 1999
 LRT1
 MWSS with Maynilad Water Services

FEATURES OF BOT ARRANGEMENTS:

1. The service to be provided by the operator under the BOT arrangement is of PUBLIC
SERVICE NATURE and shall be provided to the public on behalf of the public sector entity or
government.

2. The grantor of the BOT contract is a public sector entity, including a government body,
or a private sector entity to which the responsibility for the service has been devolved.

3. The operator is responsible for at least some of the management of the infrastructure
and related services and does not merely act as an agent on behalf of the grantor.

4 The contract sets the initial prices to be levied by the operator and regulates price
revisions over the period of the service arrangement.

5. The operator is obliged to hand over the infrastructure to the grantor in a specified
condition at the end of the period of the arrangement, for little or no incremental consideration,
irrespective of which party initially financed it.

The common characteristic of all service concession arrangements is that the OPERATOR both
receives a RIGHT and INCURS an OBLIGATION to provide PUBLIC SERVICES.
SCOPE:

IFRIC 12 applies to BOT if:

1. The GRANTOR (i.e., government) CONTROLS or REGULATES
i. what the services the operator must provide with the infrastructure
ii. to whom it must provide them, and
iii. at what price and

2. The GRANTOR controls, through ownership, beneficial entitlement or otherwise, any

significant residual interest in the infrastructure at the end of the term of the arrangement.

IFRIC 12 applies to both:

1. Infrastructure that the operator constructs or acquires from a third party for the purpose of
the service arrangement, and
2. Existing infrastructure to which the grantor gives the operator access for the purpose of the
service arrangement.

The outsourcing of the operation of a governmental unit’s internal services (like CAFETERIA, BUILDING
MAINTENANCE, and ACCOUNTING or INFORMATION TECHNOLOGY FUNCTIONS) is not a service
concession arrangement within the scope of IFRIC 12 or SIC 29.

IFRIC 12 does not apply to the accounting by grantors like the government.

 ACCOUNTING ISSUES
 IFRIC 12 sets out the general principles on recognizing and measuring the obligations and
related rights in service concession arrangements. It deals with the accounting for the
following:
1. * Treatment of the operator’s right over the infrastructure
2.** Recognition and measurement of arrangement consideration
3. Construction or upgrade services
4. Operation services
5. Borrowing costs
6. Subsequent accounting treatment of a financial asset and an intangible
asset; and
7. Items provided to the operator

* TREATMENT OF THE OPERATOR’S RIGHTS OVER THE INFRASTRUCTURE

 The infrastructure referred to in BOT contract accounted for under IFRIC 12
shall NOT be recognized AS property, plant and equipment of the operator.
 Why? Because the contractual service arrangement does not convey the
right to control the use of the public service infrastructure to the operator.
 The operator only has access to operate the infrastructure to provide the
public service on behalf of the grantor in accordance with the terms
specified in the contract.

** RECOGNITION AND MEASUREMENT OF ARRANGEMENT CONSIDERATION

 Under BOT arrangement that is within the scope of IFRIC 12, the OPERATOR
ACTS as a SERVICE PROVIDER.
 Such services maybe:
1. Construction or upgrade services
 The operator construct or upgrades infrastructure used to
provide a public service; and

2. Operation services
 The operator operates and maintains that infrastructure for
a specified period of time.

 The operator shall recognize and measure revenue in accordance with PFRS
15 REVENUE FROM CONTRACTS WITH CUSTOMERS for the services it
 performs. The nature of the consideration determines its subsequent
accounting treatment.

*** CONSTRUCTION OR UPGRADE SERVICES

 The operator shall account for construction or upgrade services in
accordance with PFRS 15
 Consideration given by the grantor to the operator

 If the operator provides construction or upgrade services, the

consideration received or receivable by the operator shall be recognized
in accordance with PFRS 15. The consideration may be RIGHTS to:

 FINANCIAL ASSETS
 INTANGIBLE ASSETS

FINANCIAL ASSETS --- A financial asset shall be

recognized if the operator has an
UNCONDITIONAL CONTRACTUAL
RIGHT TO RECEIVE CASH or another financial
asset from the grantor, such as when the
grantor contractually guarantees to pay
the operator:
a. Specified or determinable amounts or
b. The shortfall, if any, between amount received from
users of the public service and the specified or
determinable amounts even if payment
is contingent on the operator ensuring that the
infrastructure meets specified quality or efficiency
requirements.

The amount due from or at the direction of the grantor is accounted for in accordance with
PFRS 9 FINANCIAL INSTRUMENTS as measured at:
a. Amortized cost; or
b. Fair value through other comprehensive income(FVOCI); OR
C. Fair value through profit or loss (FVPL)
If the financial asset is measured at amortized cost or FVOCI, the related interest shall be
calculated using the effective interest method.

INTANGIBLE ASSET - an intangible asset shall be

recognized if the operator receives a right( a license) to charge users of the
public service.

A right to charge users of the public service is not an unconditional right to

receive cash(i.e., not a financial asset) because the amounts are contingent
on the extent that the public uses the service.

The operator shall account for the intangible asset(license) it has received
from the grantor using PAS 38 Intangible Assets.

PARTLY BY A FINANCIAL ASSET AND AN INTANGIBLE ASSET

If the consideration received or receivable is partly a financial asset and partly
an intangible asset, each component shall be accounted for separately and both
components be recognized initially in accordance with PFRS 15.

**** OPERATION SERVICES

CONTRACTUAL OBLIGATIONS TO RESTORE THE INFRASTRUCTURE TO SPECIFIED
LEVEL OF SERVICEABILITY:
The operator may have contractual obligations it must fulfill as a
condition to its license
a. To maintain the infrastructure to a specified level of
serviceability
 b. To restore the infrastructure to a specified condition before it
handed over to the grantor at the end of the service arrangement.

These contractual obligations to maintain or restore infrastructure, except for any

upgrade element, shall be recognized and measured in accordance with PAS 37
Provisions, Contingent Liabilities and Contingent Assets, i.e., at the best estimate of
the expenditure that would be required to settle the present obligation at the end of
the reporting period.

*****BORROWING COST INCURRED BY THE OPERATOR

In accordance with PAS 23 Borrowing Cost, borrowing costs attributable to the
arrangement shall be recognized as an EXPENSE in the period in which they are incurred unless
the operator has a contractual right to receive an INTANGIBLE ASSET ( a right to charge users of
the public service). In this case, borrowing costs attributable to the arrangement shall be
capitalized during the construction phase of the arrangement in accordance with PAS 23.

******* ITEMS PROVIDED TO THE OPERATOR BY THE GRANTOR

 Infrastructure items to which the operator is given access by the grantor for the
purposes of the service arrangement are not recognized as property, plant and
equipment of the operator.
 The grantor may also provide OTHER ITEMS to the operator that the operator
can keep or deal with as it wishes. If such assets form part of the consideration
payable by the grantor for the services, they are not government grants as
defined in PAS 20 Accounting for Government Grants and Disclosure of
Government Assistance. Instead, they are accounted for as part of the
transaction price as defined in PFRS 15.

Accounting FOR SERVICE CONCESSION ARRANGMENTS

 A SERVICE CONCESSION ARRANGEMENT is an arrangement whereby a government or other

public sector body ( the grantor) contracts with a private operator to develop ( or upgrade), operate
and maintain the grantor’s infra structure assets such as roads, bridges, tunnels, airports, energy
distribution networks, prisons or hospitals.
 In those arrangements, the grantor controls or regulates what services the operator must provide
using the assets, to whom, and at what price, and also controls any significant residual interest in
the assets at the end of the term of the arrangement.

TWO PRINCIPAL CATEGORIES OF SERVICE CONCESSION ARRANGMENTS

1. THE OPERATOR RECEIVES A FINANCIAL ASSET --- an unconditional contractual right to
receive a specified or determinable amount of cash or another, financial asset from the government in
return for constructing or upgrading a public sector asset, and then operating and maintaining the asset
for a specified period of time.

 This category includes-----guarantees by the government to pay for any shortfall

between amounts received from users of the public service and specified or
determinable amounts.

2. THE OPERATOR RECEIVES AN INTANGIBLE ASSET---- a right to charge for use of a public
sector asset that it constructs or upgrades and then operates and maintains for a specified period of
time. A right to charge users is not an unconditional right to receive cash because the amounts are
contingent on the extent to which the public uses the service.

Sometimes, a single contract may contain both types:

 to the extent that the government has given an unconditional guarantee of payment
for the construction of the public sector asset, the operator has a financial asset;
 to the extent that the operator has to rely on the public using the service in order to
obtain payment, the operator has an intangible asset.

ACCOUNTING - FINANCIAL ASSET MODEL

 The operator shall recognize a financial asset to the extent that it has an unconditional
contractual right to received cash or another financial asset from or at the direction of the grantor for
the construction services.
The operator shall measure the financial asset at fair value. Thereafter, it shall follow Section 11
Basic Financial Instruments and Section 12 Other Financial Instruments Issues in accounting for the
financial asset.

ACCOUNTING - INTANGIBLE ASSET MODEL

 The operator shall recognize an intangible asset to the extent that it receives a right( a
license) to charge users of the public service.
 The operator shall initially measure the intangible asset at fair value. Thereafter, it shall
follow Section 18 in accounting for intangible asset.
 The operator of a service concession arrangement shall recognize, measure and disclose
revenue in accordance with section 23 Revenue for the service it performs.

SELF-CHECK: for BOT and INSURANCE CONTRACTS

1. It is an arrangement whereby a government or other public sector body contracts with a

private operator to develop or upgrade, operate and maintain the grantor’s
infrastructure assets, such as roads. Bridges, tunnels, airport, etc.
A. Service concession
B. Government grant
C. Government assistance
D. Government loan

2. According to IFRIC 12, Service Concession Arrangement, the infra structure asset shall be
recognized by the operator as
A. Plant , property and equipment
B. Financial asset
C. Intangible asset
D. Either Financial asset or intangible asset

3. It is a type of service concession arrangement whereby the operator receives a right to

charge for use of a public sector asset that it construct or upgrades and then
must operate and maintain for a specified period of time.

A. Plant , property and equipment

B. Financial asset
C. Intangible asset
D. Either Financial asset or intangible asset

4. In some cases, the grantor may provide other items to the service concession operator.
If such assets form part of the consideration payable by the grantor for the
services, these assets are recognized as

A. Governments grants
B. Government assistance
C. Assets of the operator measured at fair value on initial recognition
D. Government loan

5. The operator of the BOT arrangement shall recognize and measure revenue in
accordance with:

A. PFRS 15
B. PRFS 9
C. PAS 23
D. PAS 32 & PFRS 9

6. In construction or upgrade services, the operator shall account for revenue and costs
relating to construction or upgrade services in accordance with PFRS 15,
generally using the:
 A. Over-time/Stage of completion method
B. Point-in-Time/Cost recovery method
C. Completed contract method
D. Cash method

7. The arrangement is governed by a contract between the operator and the government
that sets out performance standards, mechanisms for adjusting prices or rates
and arrangement for arbitrating disputes. Such arrangements are often described
as:

A. A “Build-operate-transfer” arrangement or a “rehabilitate-operate -transfer

arrangement
B. Conditional cash transfer program
C. Governments grants
D. Government assistance

8. The IFRIC 12 applies only if:

A. The grantor controls or regulates what services the operator must provide with
the infrastructure, to whom it must provide them, and at what price;
B. The grantor controls – through ownership, beneficial entitlement or otherwise –
any significant residual interest in the infrastructure at the end of the term of
the arrangement.
C. Both A and B
D. None of the above

9. This Interpretation provides that accounting principles for recognizing and measuring
the obligations and related rights in service concession arrangements. The
issues addressed are:

I. operation services
II. borrowing costs
III. subsequent accounting treatment of a financial asset and an intangible aeet:
and items provided to the operator by the grantor.

A. I and II only
B. II and III only
C. I and III only
D. I, II and III

10. Under the financial asset model of Service Concession Arrangement, the operator has
unconditional right to receive cash if the grantor contractually guarantees to pay
the operator:
A. Specified or determinable amounts
B. The shortfall between amounts received from users of the public service and
specified or determinable amounts
C. Either specific/determinable amounts or the shortfall between amounts from
users of public service and specified/determinable amounts.
D. Neither specific/determinable amounts nor the shortfall between amounts
received from users of public service and specified/determinable
amounts.

INSURANCE CONTRACT:

11. “CEDANT” is the

A. The party that has an obligation under reinsurance contract to compensate the
policyholder, if the insured event occurs.
B. The party has an obligation under an insurance contract to compensate the
policyholder, if the insured event occurs
C. The party has a right to compensate under an insurance contract, if the insured
event occurs.
D. The party that has a right to compensate under reinsurance contract, if the
insured event occurs.
 12. It is an insurance contract issued by one insurer to compensate another insurer for
losses on one or more contracts issued by the cedant

A. Insurance contract
B. Re-insurance contract
C. Direct insurance contract
D. Financial guarantee contract

13. It is a demand by any party for payment by the insurer of a policy benefit on account of
an alleged loss resulting from an event or events alleged to be covered by a policy of insurance.

A. Liability adequacy test

B. Pipeline premiums
C. Acquisition cost
D. Insurance claim

PIPELINE PREMIUMS - premiums could have written by insurance agents close to the
end of the reporting period, BUT the POLICIES may not have been booked-in at the end of the
reporting period by the insurer due to administrative delays in the submission of returns by the
agents. In such cases, the insurer shall estimate and recognize the pipeline premiums to account for
all risk assumed during the financial period. Such estimates may be made by using information from
prior periods and adjusting for the impact of recent trends and events. The estimates of the pipeline
premiums may be corrected by information received in the post-statement of financial position period.

14. The term claims is often used interchangeably with the term:
A. policy benefits
B. losses
C. both A and B
D. none of the above

15. These are commissions and agency related expenses incurred in securing premiums on
general insurance policies
A. Re-insurance
B. Claims
C. Acquisition costs
D. Pipeline premiums

16. Acquisition costs are commissions and agency related expenses incurred in securing
premiums on general insurance policies
A. Re-insurance
B. Claims
C. Acquisition costs
D. Pipeline premiums

17. It arises when the unearned premium reserve is less than the anticipated claims and
related expenses
A. Premium deficiency
B. Claims
C. Acquisition costs
D. Premiums