Chapter 15

Miscellaneous Topics
Scope of this chapter
The following are discussed in this Chapter:
a. Service Concession Arrangements by Grantor;
b. Interests in Joint Ventures; and
c. The Effects of Changes in Foreign Exchange Rates.

Service Concession Arrangements by Grantor

● Service Concession Arrangement – is a binding arrangement between a
grantor and an operator in which:
a. The operator uses the service concession asset to provide a public service on
behalf of the grantor for a specified period of time; and
b. The operator is compensated for its services over the period of the service
concession arrangement.
➢ Binding Arrangements – are contracts and other arrangements that confer
similar rights and obligations on the parties to it as if they were in the form of a
contract.
➢ Grantor – is the public sector entity (government entity) that grants the right to
use the service concession asset to the operator.
➢ Operator – is the private entity that uses the service concession asset to provide
public services subject to the grantor's control of the asset.
➢ Service Concession Asset - is an asset used to provide public services in a
service concession arrangement that:
1. Is provided by the operator which:
i. the operator constructs, develops, or acquires from a third party; or
ii. is an existing asset of the operator; or
2. Is provided by the grantor which:
i. is an existing asset of the grantor; or
ii. is an upgrade to an existing asset of the grantor.
(PPSAS 32.8)

Other terms for service concession arrangement are "build-operate-transfer"

(BOT) arrangements, “rehabilitate operate-transfer," "public-to-private service
concession" and "private-public partnership (PPP).
Examples of concession arrangements under R.A. No.7718 (An Act
Amending Certain Sections Of R.A. No. 6957, Entitled "An Act Authorizing The
Financing, Construction, Operation And Maintenance of Infrastructure Projects By The
Private Sector, And For Other Purposes"):
a. Build-operate-and-transfer (BOT) – the private entity awarded with the contract
undertakes to finance the construction of an infrastructure facility and operate it for a
fixed term not to exceed 50 years. At the end of the term, the facility is transferred to
the government. If the interest of the Government so requires, the transfer of the facility
includes the transfer of process technology and training of Filipino nationals.
b. Build-transfer-and-operate (BTO) – the private entity awarded with the contract
undertakes to complete the construction of a facility, assuming cost overruns, delays,
and specified performance risks. Upon completion, the facility is immediately transferred
to the government. However, the private entity operates the facility on behalf of the
government under an agreement.
c. Rehabilitate-operate-and-transfer (ROT) - the private entity awarded with the
contract undertakes to rehabilitate or refurbish an existing facility of the government
then operate it for a certain period. At the end of that period, the facility is reverted back
to the government.
d. Develop-operate-and-transfer (DOT) - a private entity awarded with an
infrastructure project is also given the right to develop an adjoining property, thereby
enjoying some benefits in the form of higher property or rent values brought about by
the government infrastructure project.
e. Contract-add-and-operate (CAO) – the private entity adds to an existing
infrastructure facility, which it is renting from the government, then operates the added
facility over an agreed period. Ownership over the added facility may or may not be
transferred to the government. If there is a transfer of ownership, the contract is
accounted for as a service concession arrangement

Recognition and Measurement of Asset

The grantor recognizes a service concession asset if:
a. The grantor controls or regulates what services the operator must provide with the
asset, to whom it must provide them, and at what price; and
b. The grantor controls, through ownership, beneficial entitlement or otherwise, any
significant residual interest in the asset at the end of the term of the arrangement.
(PPSAS 32.9)
Complete control of the price is not necessary. It is sufficient that the price is
regulated.
If the operator has freedom to set prices, the grantor controls the price if any
excess profit is returned to the grantor (i.e., the operator's return is capped).
Control shall be distinguished from management. If the grantor retains both the
degree of control described in (a) and (b) above, the operator is only managing the
asset on the granto behalf, even though the operator may have wide managerial
discretion.
 A grantor recognizes even a "whole-of-life" asset (i.e., an asset used in a service
concession arrangement for its entire useful life) if the conditions in (a) and (b) above
are met.

Initial measurement
A service concession asset is initially measured at:
a. Fair value, if the asset is provided by the operator in accordance with the recognition
criteria in (a) and (b) above.
b. Cost, in accordance with the measurement principles for PPE or Intangible Assets, as
appropriate, if the asset is reclassified from the existing assets of the grantor, e.g., an
existing asset is transferred to the operator for refurbishing.

Subsequent measurement
A service concession asset is subsequently accounted for as service concession
tangible asset. (a separate class of PPE) or as service concession intangible asset (a
separate class of intangible assets), as appropriate.

Recognition and Measurement of Liability

When the grantor recognizes a service concession asset, the related liability is
measured at the same amount, adjusted for any other consideration (e.g., cash)
received from or paid to the operator.
ating asset of the set, except when
No liability is recognized when an existing asset of the grantor is reclassified as a
service concession asset, except when the operator provides additional consideration.
In exchange for the service concession asset the grantor may compensate the
operator by one or a combination of the following:
1.Making payments to the operator ('financial liability model’)
2. Granting the operator the:
a. Right to collect fees from users of the service concession asset; or
b. Right to access another revenue-generating asset operator's use (e.g., a private wing
of a hospital whe remainder of the hospital is used by the grantort public patients or a
private parking facility adjacent to a public facility). (PPSAS 32.17)

Financial Liability Model

The grantor recognizes a financial liability if it incur unconditional obligation to pay cash
or another financial asset to the operator in exchange for the service concession asset.
The payments shall be allocated as a reduction in the liability, a finance charge,
and charges for services provided by the operator.
 Where the asset and service components of a service concession arrangement
are separately identifiable, the payments are allocated based on the relative fair values
of the components. If the components are not separately identifiable, the grantor shall
estimate the service component of the payments.

Grant of Right to the Operator Model

If the operator is compensated by a grant of right to earn revenue from third-party users
or another revenue-generating asset, the grantor recognizes a liability for the unearned
portion of the revenue arising from the exchange of assets between the grantor and the
operator.
The grantor then recognizes revenue for the earned portion over the contract
term according to the economic substance of the service concession arrangement.

Dividing the Arrangement

If the operator is compensated partly by payments and partly by grant of right, the
grantor shall allocate the total liability to these elements and account for them
separately.
The amount initially recognized for the total liability shall be the same amount as
the service concession asset adjusted for any other consideration (e.g., cash) received
from or paid to the operator.

Impairment and Derecognition

The grantor uses the same principles used for PPE and intangible assets to account for
the impairment or derecognition of service concession assets.

Interests in Joint Venture

Introduction
● Joint Venture – is a binding arrangement whereby two one parties are
committed to undertake an activity that is subject joint control.
➢ Joint control – is the agreed sharing of control over an activity by a binding
arrangement. (PPSAS 8.6)

The following are the three forms of joint ventures:

a. Jointly controlled operations
b. Jointly controlled assets
c. Jointly controlled entities

Jointly Controlled Operations

In a jointly controlled operation, each venturer uses and recognizes its own assets,
incurs its own liabilities and expenses, but each will share in the income from sales by
the joint venture. Each venturer records joint venture transactions in its own books of
account

● Venturer – is a party to a joint venture and has joint control over that joint
venture. (PPSAS 8.6)

Jointly Controlled Assets

In a jointly controlled assets, each venturer recognizes its ch. the assets, liabilities,
income and expenses of the joint va classified according to the nature of those items,
rather than through an investment account. Each venturer records venture transactions
in its own books of account.

Jointly Controlled Entities

In a jointly controlled entity, a separate entity (e.g.,a corporation) is established. The
separate entity recognizes its own assets, liabilities, equity, income and expenses in its
own books of accounts, separate from those of the venturers.
Each venturer recognizes its interest in the net assets of the separate entity
through an investment account (i.e., Investment in Joint Venture). The investment in
joint venture is accounted for under the equity method.

Under the equity method, the investment is initially recognized at cost and
subsequently adjusted for the venturer's share in the changes in the equity of the
investee (e.gu, share in surplus or deficit, share in dividends).

An investor that does not have joint control but has significant influence over the
joint venture shall account for its interest as investment in associates. Investment in
associates is also accounted for under the equity method.
➢ Significant influence - is the power to participate in the financial and operating
policy decisions of an activity but is not control or joint control over those policies.
(PPSAS 8.6)
The entity shall discontinue the use of the equity method from the date it ceases
to have joint control or significant influence over a jointly controlled entity.
An interest in a jointly controlled entity that is acquired with the exclusive view of
disposal within 12 months from acquisition shall be accounted for as financial asset
held for trading.
An operator or manager of a joint venture recognizes the management fees it
receives as revenue while the joint venture recognizes those fees as expenses.

The Effects of Changes in Foreign Exchange Rates

Initial Measurement
A foreign currency transaction is initially measured by translating the foreign currency
amount into the functional currency using the spot exchange rate.

● Foreign Currency Transactions - are transactions that are denominated and

require settlement in foreign currency, e.g., buying and selling goods or services
at prices denominated in a foreign currency and settling receivables and
payables denominated in foreign currency.
● Foreign Currency – a currency other than the functional currency of the entity.
(PPSAS 4.10)
● Functional Currency – the currency of the primary economic environment in
which the entity operates. (PPSAS 4.10)
● Spot exchange rate – the exchange rate for immediate delivery. (PPSAS
4.10) ...or simply, the current exchange rate on a given date.
● Exchange Rate – the ratio of exchange for two currencies. (PPSAS 4.10)

Subsequent Measurement
At each reporting date, the following items are translated follows:
Items Translated Using
a. Monetary Items - Closing rate
b. Nonmonetary items measured at - Exchange rate at the date of
historical cost. transaction.
c. Nonmonetary items measured at - Exchange rate at the fair value
fair value. measurement date.

● Closing rate – the spot exchange rate at the reporting date.

● Monetary items – are units of currency held and assets and liabilities to be
received or paid in a fixed or determinable number of units of currency. (PPSAS
4.10)
● Non-Monetary items - items which essential feature is the absence of a right to
receive (or an obligation to deliver) a fixed or determinable number of units of
currency. (PPSAS 4.10)

Exchange Differences
Exchange differences arising from the translation of:
a. Monetary items are recognized in surplus or deficit in the period in which they arise.
b. Nonmonetary items – if the gain or loss is recognized in equity, the exchange
component of the gain or loss is also recognized in equity; if the gain or loss is
recognized in surplus or deficit, the exchange component is also recognized in surplus
and deficit.
● Exchange difference – the difference resulting from translating a given number
of units of one currency into another currency at different exchange rates.
(PPSAS 4.10)

Translation of Financial Statements

An entity is required to present its financial statements using its functional currency (i.e.,
Philippine pesos). However, whenever needed, the entity may translate its financial
statements into any presentation currency (e.g., Japanese yen, US dollars, etc.), as
follows:
Items Translated using
a. Assets and Liabilities - Closing rate at the date of the
(including comparative) statement of financial position.
b. Revenues and Expenses - Exchange rates at the dates of the
(including comparative) transactions.
- All resulting exchange difference are recognized as a separate component
equity.

Chapter 15 Summary:
● Under a service concession arrangement a private entity ('operator') uses the
service concession asset to provide public service on behalf of the government
(‘grantor') in exchange for compensation which is (a) payments in cash or (b)
grant of right to collect fees from users of the asset or right to access another
revenue-generating asset, or (c) a combination of (a) and (b).
● A service concession asset is either an asset that the operator provides to the
grantor or an existing asset of the grantor that the operator undertakes to
refurbish.
● A service concession asset is initially measured at fair value if it is provided by
the operator to the grantor for which the grantor obtains control of. In other
cases, the service concession asset is initially measured at cost.
● A service concession asset is subsequently accounted for as either PPE or
intangible asset.
● If the compensation to the operator is in the form of payments, the grantor
recognizes a financial liability that is subsequently measured at amortized cost. If
the compensation is in the form of grant of right, the grantor recognizes a liability
for unearned revenue that will be recognized as revenue when earned in
accordance with the substance of the service concession arrangement
● The three forms of joint ventures under the GAM for NGAS are (1) Jointly
controlled operations, (2) Joint controlled assets, and (3) Jointly controlled
entities.
● Under jointly controlled operations, the joint venturer recognizes its own costs,
assets, and liabilities but recognizes its share in the sale revenue of the joint
venture.
● Under jointly controlled assets, the joint venturer reco share in the joint
venture's assets, liabilities, inco expenses and include them line-by-line to its own
liabilities, income and expenses.
● Under jointly controlled entities, the joint venturer reco interest in the joint
venture (a separate entity) unde "Investment in Joint Venture" account, which is
accounted using the equity method.
● A foreign currency transaction is initially measured translating the foreign
currency amount into the functional currency using the spot exchange rate.
● At each reporting date, monetary items are translated using the closing rate;
nonmonetary items measured at historical cost are translated using historical
exchange rates; and nonmonetary items measured at fair value are translated
using the exchange rate at the date when the fair value was determined.
● Exchange differences on monetary items are recognized in surplus or deficit
while exchange differences on nonmonetary items are recognized either in equity
or in surplus or deficit.
● An entity is required to present its financial statements using its functional
currency. However, it can translate its financial statements to any presentation
currency whenever needed.
● When translating financial statements, assets and liabilities are translated using
the closing rate at the reporting date. Revenues and expenses are translated at
the exchange rates at the dates of the transactions. All resulting exchange
differences are recognized in equity.