Use the fact pattern below for the next three independent cases:

Fact pattern
On January 1, 20x1, CHASTE PURE Co. enters into a service concession arrangement (BOT
contract) with the government. The following are terms of the arrangement:
a. CHASTE Co. shall construct a railway with an expected completion time of two (2) years –
20x1 to 20x2.
b. After completion, CHASTE Co. shall maintain and operate the railway for eight (8) years –
20x3 to 2x10.
c. In 20x8, CHASTE Co. shall refurbish the railway.
d. At the end of the 10th year (2x10), the contract shall be terminated and the infrastructure will
be handed over to the government.

CHASTE Co. made the following estimates of costs to be incurred on the contract (amounts in
‘000,000s):
  Year Estimated contract costs

Construction services 20x1 9,000

Construction services 20x2 9,000
Operation services (per year) 20x3 - 2x10 180
Refurbishing 20x8 1,800

Case #1: Consideration in the form of financial asset

Use the fact pattern and the information below for the next eight questions:
As consideration, the government shall pay CHASTE Co. P3,600M every year, for eight (8)
years, starting in 20x3. CHASTE Co. made the following estimates of the fair value of
consideration receivable:
Construction services Forecast cost + 5%
Operation services Forecast cost + 20%
Refurbishing Forecast cost + 10%
Effective interest rate 6.18% per year

The consideration receivable from the government (i.e., P3,600M per year) includes
consideration for the refurbishing activity. Thus, the refurbishing activity is considered revenue-
generating.

CHASTE Co. expects to finance the contract wholly with debt and retained profits. The effective
interest rate on borrowings is 6.70%.

It is assumed that all cash inflows and outflows take place at the end of each year.

1. How much is the total expected revenues to be recognized over the years covered under the
contract?
a. 22,608 b. 23,560 c. 23,608 d. 22,680

2. How much is the balance of the contract receivable as of December 31, 20x2?
a. 9,450 b. 19,448 c. 20,104 d. 19,484

3. How much is the balance of the contract receivable as of December 31, 20x3?
a. 17,304 b. 19,878 c. 20,742 d. 19,788

4. How much is the balance of the loan payable as of December 31, 20x2?
 a. 18,603 b. 18,787 c. 19,733 d. 19,892

5. How much is the balance of the loan payable as of December 31, 20x3?
a. 15,390 b. 16,429 c. 19,813 d. 20,182

6. How much is the profit (loss) in 20x1?

a. 450 b. 431 c. 422 d. 542

7. How much is the profit (loss) in 20x2?

a. 450 b. 431 c. 422 d. 542

8. How much is the profit (loss) in 20x3?

a. (8) b. (6) c. (4) d. (2)

Case #2: Consideration in the form of intangible asset (a license to charge users)
Use the fact pattern and the information below for the next eight questions:
As consideration, the government allows CHASTE Co. to collect fees from users of the railway.
CHASTE Co. forecasts that it will collect fees of P3,600M per year from railway users in each of
years 20x3 to 2x10 (i.e., period of operation).

CHASTE Co. estimates that the fair value of the consideration received (i.e., license to charge
users) is equal to the forecast construction costs plus 5% margin.

The consideration received from the government (i.e., license to charge users) does not include
consideration for the refurbishing activity. Thus, the refurbishing activity is not considered
revenue-generating. CHASTE’s refurbishing obligation arises as a consequence of use of the
railway during the operating phase.

Using PAS 37 Provisions, Contingent Liabilities and Contingent Assets, CHASTE Co.’s best
estimate of the expenditure required to settle the obligation at any date is proportional to the
number of rail vehicles that have used the railway by that date and increases by P30M
(discounted to a current value) each year. The effective interest rate is 6%.
.
CHASTE Co. expects to finance the contract wholly with debt and retained profits. The effective
interest rate on borrowings is 6.70%. Borrowing costs shall be capitalized in accordance with
PAS 23 Borrowing Costs.

It is assumed that all cash inflows and outflows take place at the end of each year and all
estimated amounts coincide with actual amounts.

9. How much is the total expected revenues to be recognized over the years covered under the
contract?
a. 47,700 b. 74,700 c. 74,400 d. 77,400

10. How much is the capitalizable borrowing costs?

a. 603 b. 1,849 c. 1,894 d. 630

11. How much is the balance of the contract receivable as of December 31, 20x2?
a. 9,450 b. 19,484 c. 20,104 d. 0

12. How much is the balance of the intangible asset received as consideration for the
arrangement as of December 31, 20x3?
a. 16,538 b. 19,503 c. 17,065 d. 17,553

13. How much is the balance of the refurbishing obligation as of December 31, 20x3?
a. 224 b. 274 c. 294 d. 242
14. How much is the profit (loss) in 20x1?
a. 450 b. 431 c. 422 d. 542

15. How much is the profit (loss) in 20x2?

a. 450 b. 431 c. 422 d. (38)

16. How much is the profit (loss) in 20x3?

a. (488) b. (466) c. (444) d. (442)

Case #3: Consideration in the form of financial asset and intangible asset
Use the fact pattern above.
As consideration, CHASTE Co. received from the government the following:
a. A license to collect fees from users of the railway.
b. A guaranteed minimum amount of ₱12,600M and interest at 6.18% to reflect the timing of
cash receipts.

CHASTE Co. forecasts that it will collect fees of ₱3,600M per year from railway users in each of
years 20x3 to 2x10 (i.e., period of operation).

CHASTE Co. estimates that the fair value of the consideration in respect of construction services
is equal to the forecast construction costs plus 5% margin.

The considerations received from the government do not include consideration for the
refurbishing activity. Thus, the refurbishing activity is not considered revenue-generating.
CHASTE’s refurbishing obligation arises as a consequence of use of the railway during the
operating phase.

Using PAS 37 Provisions, Contingent Liabilities and Contingent Assets, CHASTE Co.’s best
estimate of the expenditure required to settle the obligation at any date is proportional to the
number of rail vehicles that have used the railway by that date and increases by ₱300M
(discounted to a current value) each year. The effective interest rate is 6%.
.
CHASTE Co. expects to finance the contract wholly with debt and retained profits. The effective
interest rate on borrowings is 6.70%. Borrowing costs shall be capitalized in accordance with
PAS 23 Borrowing Costs.

It is assumed that all cash inflows and outflows take place at the end of each year and all
estimated amounts coincide with actual amounts.

17. How much is the financial asset component of the total consideration received or receivable?
a. 12,600 b. 6,917 c. 18,900 d. 9,766

18. How much is the intangible asset component, excluding any capitalizable borrowing cost, of
the total consideration received or receivable?
a. 9,450 b. 7,634 c. 6,300 d. 5,432

19. What are the allocation percentages to the financial asset and intangible asset components,
respectively?
a. 661/3%; 33/3% b. 42%; 58% c. 71%; 29% d. 64%; 36%

20. How much is the balance of the contract receivable on December 31, 20x2?
a. 13,989 b. 12,989 c. 14,755 d. 13,678

21. How much is the amount of subsequent collections allocated to the financial asset?
a. 2,661.68b. 2,755.68 c. 2,678.68 d. 2,106.68
22. How much is the amount of subsequent collections allocated to the intangible asset?
a. 939.32 b. 1,493.32 c. 844.32 d. 921.32

23. How much is the total expected revenues to be recognized over the years covered under the
contract?
a. 47,700 b. 34,700 c. 30,847 d. 37,400

24. How much is the annual amortization on the intangible asset?

a. 862.88 b. 650.10 c. 690.30 d. 812.63

25. How much is the profit (loss) in 20x1?

a. 450 b. 431 c. 422 d. 542
 KEY TO CORRECTIONS

Answers at a glance:
1. A 11. D 21. D

2. D 12. C 22. B

3. A 13. A 23. C

4. A 14. A 24. D

5. B 15. A 25. A

6. A 16. A

7. B 17. A

8. B 18. C

9. A 19. A

10. A 20. B

Solutions:
1. A
Solution:

Year Forecast cost Percentage Revenues for each period

a b = (1 + %) c=axb

20x1 9,000 105% 9,450

20x2 9,000 105% 9,450

20x3 180 120% 216

20x4 180 120% 216

20x5 180 120% 216

20x6 180 120% 216

20x7 180 120% 216

20x8 180 + 1,800 a (120% & 110%) b 2,196 c

20x9 180 120% 216

2x10 180 120% 216

22,608

a
(₱180 for operation services + ₱1,800 for refurbishing activities)

b
(120% for operation services + 110% for refurbishing activities)

c
₱2,196 = (₱180 x 120%) + (₱1,800 x 110%)

2. D
Solution:
 Interest Amort- Revenue for Present value of
Year Collec-tions income ization the period receivable

b=ex e = prev. bal. - c +

a 6.18% c=a-b d d

1/1/x1 -

12/31/x1 - - - 9,450 9,450

12/31/x2 - 584 (584) 9,450 19,484

12/31/x3 3,600 1,204 2,396 216 17,304

3. A (See solution above)

4. A
Solution:

Interest Costs each Present value

Year Payments Amorti-zation
expense year of payable

b=ex e = prev. bal. -

  a 6.70% c=a-b d c+d

1/1/x1 -

12/31/x1 - - - 9,000 9,000

12/31/x2 - 603 (603) 9,000 18,603

12/31/x3 3,600 1,246 2,354 180 16,429

5. B (See solution above)

6. A
Solution:

  20x1 20x2 20x3

Revenue 9,450 9,450 216

Contract costs (9,000) (9,000) (180)

Interest income - 584 1,204

Interest expense - (604) (1,246)

Profit (Loss) 450 430 (6)

7. B (See solution above)

8. B (See solution above)

9. A
Solution:

Year Forecast cost Percentage Revenues for each period

  a b = (1 + %) c=axb

20x1 9,000 105% 9,450

 20x2 9,000 105% 9,450

20x3 N/A N/A 3,600

20x4 N/A N/A 3,600

20x5 N/A N/A 3,600

20x6 N/A N/A 3,600

20x7 N/A N/A 3,600

20x8 N/A N/A 3,600

20x9 N/A N/A 3,600

2x10 N/A N/A 3,600

47,700

10. A
Solution:

Interest Costs each Present value

Year Payments Amorti-zation
expense year of payable

e = prev. bal. - c
  a b = e x 6.70% c=a-b d +d

1/1/x1 -

12/31/x1 - - - 9,000 9,000

12/31/x2 - 603 (603) 9,000 18,603

11. D 0

12. C
Solution:

Fair value of construction services (9,450 + 9,450) 18,900

Capitalized borrowing costs 603

Intangible asset - Dec. 31, 20x2 19,503

13. A (300 x PV of 1 @6%, n=5) = 224

14. A
Solution:

  20x1 20x2 20x3

Revenue 9,450 9,450 3,600

Contract costs (9,000) (9,000) (180)

Refurbishing expenses - - (224)

Amortization expense a (2,438)

Interest expense - - (1,246)

 on borrowings b

Profit (Loss) 450 450 (490)

15. A (See solution above)

16. A (See solution above)

a
(19,503 intangible asset ÷ 8 years) = 2,438
b
(See amortization table in #4.

17. A
Solution:
The division is made as follows:

First, the fair value of the total consideration in respect of the construction services is determined.

Total costs of construction (9,000 + 9,000) 18,000

Multiply by: 1 + 5% margin 105%

Total fair value of consideration for construction

services 18,900

Next, the guaranteed minimum amount of cash receivable is allocated to the financial asset. The
excess is allocated to the intangible asset.

Total fair value of consideration 18,900

Guaranteed minimum amount receivable in cash

(allocated to financial asset) (12,600)

Excess allocable to intangible asset 6,300

18. C (See solution above)

19. A
Solution:

Amounts allocated to:   Percentages

Financial asset 12,600 66.67%

Intangible asset 6,300 33.33%

  18,900 100.00%

20. B
Solution:

Year Collec-tions Interest Amorti-zation Construc-tion Present value of

 income Revenue receivable

e = prev. bal. - c
  a b = e x 6.18% c=a-b d +d

1/1/x1 -

12/31/x1 - - - 6,300 a 6,300

12/31/x2 - 389 (389) 6,300 a 12,989

12/31/x3 ? 803 ? - ?

a
These pertain to the amounts of construction revenue allocable to the financial asset (i.e., 9,450 x
66.67% = 6,300).

21. D
Solution:

Carrying amount of receivable before start of operation services 12,989

Divide by: PV ordinary annuity of ₱1 @6.18%, n=8 6.1658

Amount of collection per year needed to fully settle the receivable 2,106.68

22. B
Solution:

Annual collection of fees from users 3,600

Collection per year pertaining to financial asset (2,106.68)

Amount allocable to intangible asset 1,493.32

23. C
Solution:

Revenue from Revenue from intangible asset

Total
Year construction (operation services)

20x1 9,450 - 9,450

20x2 9,450 - 9,450

20x3 - 1,493.32 1,493.32

20x4 - 1,493.32 1,493.32

20x5 - 1,493.32 1,493.32

20x6 - 1,493.32 1,493.32

20x7 - 1,493.32 1,493.32

20x8 - 1,493.32 1,493.32

 20x9 - 1,493.32 1,493.32

2x10 - 1,493.32 1,493.32

18,900 11,946.56 30,846.56

24. D
Solution:

Amount of consideration allocated to intangible asset 6,300

Capitalized borrowing costs (9,000 x 6.70% x 33.33%) 201

Intangible asset - Dec. 31, 20x2 6,501

Divide by: Years 8

Amortization expense 812.63

25. A
Solution:

  20x1

Construction revenue 9,450

Revenue from intangible asset -

Interest income -

Cost of construction (9,000)

Costs of operation services -

Refurbishing expenses -

Amortization expense -

Interest expense on borrowings -

Profit (Loss) 450