MODULE ACCOUNTING FOR GOVERNMENT AND NON-PROFIT ORGANIZATIONS

CHAPTER 15 MISCELLANEOUS TOPICS

Learning Objectives

Account for Service Concession

Arrangements by Grantor.

Account for Interests in Joint Venture.

State the accounting for The Effects of

Changes in Foreign Exchange Rates

Definitions

 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.

Parties to a Service Concession Arrangement

1. Grantor – is the public sector entity (government entity) that grants the right to
use the service concession asset to the operator.

2. 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

 Service Concession Asset – is an asset used to provide public services in a

service concession arrangement that:

1. Is provided by the operator which:

a. the operator constructs, develops, or acquires from a third party; or

b. is an existing asset of the operator; or

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2. Is provided by the grantor which:

a. is an existing asset of the grantor; or

b. Is an upgrade to an existing asset of the grantor.

Recognition 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)

Initial Measurement of Asset

 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 of Asset

 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.

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Forms of Compensation of Operator

 The grantor may compensate the operator by one or a combination of the

following:

a. Making payments to the operator (‘financial liability model’);

b. Granting the operator the:

i. Right to collect fees from users of the service concession asset; or

ii. Right to access another revenue-generating asset for the operator’s

use (e.g., a private wing of a hospital where the remainder of the
hospital is used by the grantor to treat 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 incurs an unconditional obligation

to pay cash or another financial asset to the operator in exchange for the service
concession asset.

 The financial liability is subsequently measured at amortized cost.

Grant of Right to the Operator Model

 The grantor recognizes a liability for the unearned portion of the revenue and
recognizes it as revenue over the contract term according to the economic
substance of the service concession arrangement.

Interests in Joint Venture

1. Joint Venture – is a binding arrangement whereby two or more parties are

committed to undertake an activity that is subject to joint control.

2. Joint control – is the agreed sharing of control over an activity by a binding

arrangement. (PPSAS 8.6)

Forms of Joint Ventures

 The following are the three forms of joint ventures:

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1. Jointly controlled operations - 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. (KKB)

2. Jointly controlled assets - each venturer recognizes its share in the assets,
liabilities, income and expenses of the joint venture, classified according to
the nature of those items, rather than through an investment account.
(chip-in)

3. Jointly controlled entities - a separate entity is established.

Accounting

1. Jointly Controlled Operations – record your own transactions; recognize your

share in sales.

2. Jointly Controlled Assets – record your own transactions; recognize your share
in JV’s assets, liabilities, income and expenses.

3. Jointly Controlled Entities – record your interest in the “Investment in Joint

Venture” account and account for it under the equity method.

The Effects of Changes in Foreign Exchange Rates

1. A foreign currency transaction is initially measured by translating the foreign

currency amount into the functional currency using the spot exchange rate.

2. Foreign Currency Transactions – are transactions that are denominated and

require settlement in foreign currency.

3. Foreign Currency – a currency other than the functional currency of the entity.
(PPSAS 4.10)

4. Functional Currency – the currency of the primary economic environment in

which the entity operates. (PPSAS 4.10)

5. Spot exchange rate – the current exchange rate on a given date.

Subsequent Measurement

Items Translated using

a. Monetary items  Closing rate

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a. Nonmonetary items measured  Historical rate

at historical cost

a. Nonmonetary items measured  Exchange rate at the fair value

at fair value measurement date

Definitions

 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 or deficit.

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Translation of Financial Statements

Items Translated using

a. Assets and Liabilities (including  Closing rate at the date of the

comparatives) statement of financial position

a. Revenues and Expenses  Exchange rates at the dates of the

(including comparatives) transactions

 All resulting exchange differences are recognized as a separate

component of equity.

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Reference:

Accounting for Government and Non-profit Organization by Zeus Vernon B.

Millan

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