Accounting for Build-operate-transfer (BOT)

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. 430 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 P300M
(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