Accounting for partnerships

The Conceptual Framework for Financial Reporting and

the PFRSs are applicable to all reporting entities
CHAPTER 1 regardless of the type of organization. Thus, most
accounting procedures used for other types of
PARTNERSHIP business organizations are also applicable to
FORMATION partnerships. The main distinction lies on the
accounting for
Introduction equity. In addition, the accounting for partnerships
should also comply with relevant provisions of the Civil
A partnership is an unincorporated association of two Code of the Philippines.
or more individuals to carry on, as co-owners, a
business, with the intention of dividing the profits Bonus on initial investments
among themselves. The following distinguish a
An accounting problem exists when a partner's capital
partnership from other types of entities:
account is credited for an amount greater than the
a. A partnership is owned by two or more individuals, fair value of his contributions.
while a sole proprietorship is owned by only one
For instance, a partnership agreement may allow a
individual.
certain partner who is bringing in expertise or special
b. A partnership is created by agreement between the
skill to the partnership to have a capital credit
partners, while a corporation or cooperative is created
greater than the fair value of his contributions. In
by the operation of law.
such case, the additional credit to the partner's
c. A partnership is formed for a business undertaking
capital (i.e., the 'bonus') is accounted for as a
that is normally of continuing nature, while a joint
deduction from the capital of the other partners. This
venture may be formed for a limited purpose and ends
accounting method is called the "bonus" method.
when its goal is achieved.
  For instance, a partnership agreement may allow
a certain partner who is bringing in expertise or
special skill to the partnership to have a capital
 The major considerations in the accounting for
credit greater than the fair value of his
the equity of partnerships are: (a) Formation;
contributions. In such case, the additional
(b) Operations; (c) Dissolution; and (d)
credit to the partner's capital (i.e., the 'bonus')
Liquidation.
is accounted for as a deduction from the capital
 The contributions of the partners to the
of the other partners. This accounting method
partnership are initially measured at fair value.
is called the "bonus" method.
 A partner's capital balance is normally credited
 Although, the credit to the partner's capital
for the fair value of his net contribution to the
may vary due to a 'bonus,' the corresponding
partnership. If a partner's capital balance is
debit to the asset account must still be equal to
credited for an amount greater than or less
the fair value of the contribution. The
than the fair value of his net contribution,
difference between the amounts credited and
there is bonus.
debited is treated as adjustment to the capital
 Under the bonus method, any increase (or
accounts of the other partners.
decrease) in the capital credit of a partner is
deducted from (or added to) the capital credits
of the other partners. The total partnership
capital remains equal to the fair value of the
CHAPTER 2
partners' net contributions to the partnership. PARTNERSHIP
Bonus on initial investments
OPERATIONS
 An accounting problem exists when a partner's Division of profits and losses
capital account is credited for an amount
greater than the fair value of his contributions. The partners share in partnership profits or losses in
accordance with their partnership agreement.
 Unlike for salaries, a partner is entitled to a bonus
Art. 1797 of the Philippine Civil Code provides the only if the partnership earns profit. The partner is
following additional rules in the profit or loss sharing not entitled to any bonus if the partnership incurs
of partners: If only the share of each partner in the loss.
profits has been agreed upon, the share of each in the
losses shall be in the same proportion. c. Interest on capital contributions - the
partnership agreement may stipulate that capitalist
➤ An industrial partner is one who contributes partners are entitled to an annual interest on their
services to the partnership rather than cash or other capital contributions.
non-cash assets.
The partners share in partnership profits and losses
➤ A capitalist partner is one who contributes cash or based on
other non-cash assets to the partnership.
their agreement. If only the share in profits has been
➤ A partner who contributes both services and cash agreed upon, the share in losses shall be in the same
or other non-cash asset is both an industrial and a proportion.
capitalist partner.
If no profit sharing has been agreed upon, the
partners shall share in proportion to their
In addition to profit or loss sharing, the partnership
contributions. However, an industrial partner shall not
agreement may also stipulate any of the following:
be liable for losses.
a. Salaries - normally, an industrial partner receives
. Profit or loss is allocated as follows:
salary in addition to his share in the partnership's
profits as compensation for his services to the (1) Salaries, Bonus (allocated only if there is profit),
partnership. and Interest on capital, if these are stipulated; and

b. Bonuses - the managing partner may be entitled to (2) Any remaining amount is allocated based on the
a bonus for excellent management performance. P/L ratio.
 A new partner may be admitted when he
CHAPTER 3 
purchases part or all of the interest of one or
PARTNERSHIP more of the existing partners. This transaction
is a personal transaction between and among
DISSOLUTION the partners. As such, any consideration paid or
Dissolution received by a partner is not recorded in the
 As mentioned earlier, one of the partnership's books. The only entry to be made
characteristics of a partnership is that it has a in the partnership's books is a transfer within
"limited life," in the sense that the partnership equity. A new capital account is established for
agreement can be easily dissolved. the new partner and a corresponding decrease
is made on the capital account(s) of the selling
Dissolution is different from liquidation. partner(s). No gain or loss is recognized in the
Liquidation is the termination of business partnership's books.
operations or the winding up of affairs. Revaluation of assets
Partnership dissolution does not necessarily  When a partnership is dissolved but not
terminate the business. The business continues liquidated, à new partnership is created. The
until the remaining partners decide to liquidate assets and liabilities carried over to the new
the business. If the business is continued after partnership should be restated to fair values.
dissolution, new articles of partnership should The adjustment to the assets and liabilities is
be drawn up allocated first to the existing partners before
recording the admission of the new partner.
Admission of partner
The admission of a new partner may be effected partner's capital and a decrease in the old partners'
either through: capital.
a. Purchase of interest in the partnership, or
b. Investment in the partnership Goodwill method

Purchase of interest
In traditional accounting (i.e., based on US GAAP), an 1. assets are converted into cash,
additional method called "goodwill method" is used to 2. liabilities are settled, and
recognize an implied value from a partner's 3. any remaining amount is distributed to the owners.
contribution during admission (and payment to a
partner during withdrawal). This method, however, has Liquidation may be either voluntary (e.g., per
been outlawed by PFRS 3 Business Combinations. agreement of partners of a solvent partnership) or
Withdrawal, retirement or death of a partner, civil involuntary (e.g., bankruptcy).
interdiction
Conversion of non-cash assets into cash
 The conversion of assets into cash is referred
 When a partner withdraws, retires or dies, his to as "realization" while the settlement of
interest may be (a) purchased by one or all of claims of creditors and owners is referred to as
the remaining partners or (b) settled by the "liquidation." However, the term liquidation is
partnership. In case of death, the deceased used in a broader sense to include the entire
partner's estate is entitled to the value of the winding up process.
partner's interest at the date of his death.
The winding up process starts with the conversion of
non- cash assets into cash. As such, the timing of the
CHAPTER 4 "realization" of non-cash assets determines the
PARTNERSHIP manner on which the "liquidation" (i.e., payment of
claims) is carried out.
LIQUIDATION
Methods of liquidation
Liquidation may be accomplished either through:
Liquidation
1. Lump-sum liquidation all the non-cash assets of
Liquidation is the termination of business operations
the partnership are sold simultaneously, or within a
or the winding up of affairs. It is a process by which
very short period of time, and the proceeds are used
to settle first all the liabilities and any remaining partner's capital account to be offset by a loan
amount is paid to the partners under a lump-sum payable to that partner.
payment (i.e., one-time or single payment). Lump-sum
liquidation is possible when there is a contracted Lump-sum liquidation vs. Installment liquidation
buyer of all the non-cash assets or the assets are sold The following are the procedures in the accounting for
on a "package deal" basis. lump-sum liquidation and installment liquidation.

2. Installment liquidation - in most cases, it would Marshalling of assets

take some time before all the assets of a business are
converted into cash. In such case, the partners' As mentioned earlier, one of the characteristics of a
claims are settled on an installment basis as cash partnership is "unlimited liability." This is because the
becomes available, but only after all partnership personal assets of the general partners are subject to
liabilities are fully settled. the claims of partnership creditors in case of
partnership insolvency.
Settlement of claims
The legal doctrine of marshalling of assets is applied
The available cash of the partnership is used to settle when the partnership and some of the partners are
claims in the following order of priority: insolvent. The following are the rules when applying
this doctrine:
1. Outside creditors
2. Inside creditors (e.g., payables to partners) 1. First, any available assets of the partnership are
3. Owners' capital balances used to settle the partnership's liabilities.

2. Second, in case the assets of the partnership are

Right of offset insufficient to pay all liabilities (i.e., insolvency), the
solvent general partners are required to provide
As shown above, a loan payable to a partner has a additional funds from their personal assets.
higher priority over the partner's capital balance.
However, the legal right of offset allows a deficit in a
The claims to the personal assets of a partner are
ranked in the following order:
CORPORATE
a. Those owing to personal creditors of the partner.
LIQUIDATION AND
b. Those owing to partnership creditors. REORGANIZATION
c. Those owing to partners by way of contribution.
 A corporation is insolvent when its total
3. Third, in case some partners are insolvent (or liabilities exceed its total assets,
limited partners), their capital deficiency is offset to thereby resulting to financial difficulty
the capital balances of the other partners. If after in paying off debts. Under the Insolvency
allocating the capital deficiency of an insolvent (or Act of the Philippines, insolvency may be
limited) partner, a solvent partner's capital balance either:
results to a negative amount, the solvent partner is a. Voluntary the insolvent corporation
required to provide additional contribution. voluntarily applies a petition to a court of law to
be discharged from its liabilities; or
Cash priority program b. Involuntary three or more creditors of the
 Another method of ensuring that there are no 'insolvent corporation file a petition to a court
overpayments to the partners is by preparing a of law for the adjudication of the corporation
"cash priority program" or "cash distribution as insolvent.
program." This schedule determines which
partner shall be paid first and which partner
shall be paid last, after all the liabilities are Corporate liquidation
settled. This schedule can be prepared even  Liquidation is the termination of business
prior to the sale of any asset operations or the winding up of affairs. It is a
CHAPTER 5 process by which assets are converted into
cash, liabilities are settled, and any remaining
amount is distributed to the owners.
Measurement basis 3. Free assets - these are assets that have not been
 The PFRSs are applicable only to "going pledged as security for liabilities. These also include
concern" entities. Thus, the measurement bases the excess of assets pledged to fully secured
prescribed in the PFRSs do not apply to creditors over the related liabilities.
liquidating entities

Financial reports ◆ Liabilities in the statement of affairs are

Liquidating entities usually prepare the following classified into the following:
financial reports:
1. Unsecured liabilities with priority - these are
1. Statement of affairs liabilities that, although not secured by any asset, are
2. Statement of realization and liquidation mandated by law to be paid first before other
unsecured liabilities. Examples include payables for:
Additional statements, such as note disclosures and
summary of cash receipts and disbursements, may also a. Administrative expenses, e.g., filing fees,
be prepared. attorney's fees, referee's fees, trustee's fees, and
1. Assets pledged to fully secured creditors - other direct costs of the insolvency proceedings
these are assets with realizable values equal to or b. Unpaid employee salaries and other benefits
greater than the expected net settlement amounts of c. Taxes and assessments
the related liabilities for which the assets have been
pledged as security.
2. Fully secured creditors - these are liabilities
secured by assets with sufficient realizable values
2. Assets pledged to partially secured creditors -
these are assets with realizable values less than the
3. Partially secured creditors - these are liabilities
expected net settlement amounts of the related
secured by assets with insufficient realizable values
liabilities for which the assets have been pledged as
(see discussion on Assets pledged to partially secured
security
crediters of the P800,000 loan, P500,000 is a secured
claim while P300,000 is an unsecured claim).
4. Unsecured liabilities without priority - all other CHAPTER 6
liabilities not classifiable under (1), (2) or (3) above.
JOINT ARRANGEMENTS
Reorganization Joint arrangement
 Reorganization, in its broadest sense, means the
implementation of a business plan to Joint arrangement is "an arrangement of which two or
restructure or rehabilitate a corporation with more parties have joint control." (PFRS 11.4)
the hopes of increasing company value. In most
cases, reorganization involves changing the Essential elements in the definition of joint
entity's capital structure. arrangement:
 There are various ways on how corporate
reorganization is carried out, and various a. Contractual arrangement
reasons why corporations undergo
b. Joint control
reorganization. Insolvency is only one of those
many reasons. Examples of situations where
Contractual arrangement
corporate reorganization may occur:
a. Buyouts and takeovers, or threats thereof A contractual agreement for the sharing of joint
b. Business combinations, reverse acquisitions, sale or control over an investee distinguishes an interest in a
transfer of subsidiaries, and demergers joint arrangement from other types of investments,
c. Formation of new holding company, e.g., when the such as investment in equity securities measured at
new holding company is a vehicle for enlisting shares in fair value (PFRS 9), investment in associate (PAS 28),
a stockM market while the business remains with the and investment in subsidiary (PFRS 3 and PFRS 10).
subsidiaries PFRS 11 is not applicable without such an agreement.
d. Recapitalization
e. An insolvent corporation enters into a corporate Joint control
rehabilitation program  is "the contractually agreed sharing of control
of an arrangement, which exists only when
 decisions about the relevant activities require a. Joint operation - is "a joint arrangement whereby
the unanimous consent of the parties sharing the parties that have joint control of the arrangement
control." (PFRS 11.7) have rights to the assets and obligations for the
liabilities of the arrangement. Those parties are
In contrast with significant influence and control, an called joint operators." (PFRS 11.15)
investor obtains joint control over an investee through  A joint operator recognizes its own assets,
a contractual agreement with fellow investors. liabilities, income and expenses plus its share in
Financial and operating decisions relating to the joint the joint operation's assets, liabilities, income
arrangement's activities require the consent of each and expenses. These items are accounted for
of the parties sharing joint control. No single party under other PFRSs applicable to the particular
obtains leverage over another in respect of voting assets, liabilities, income and expenses.
rights over financial and operating decisions. ACCOUNTING FOR JOINT OPERATION
 Accounting for joint operation transactions
PFRS 11 distinguishes between: Separate books of accounts (i.e., journal and
ledger) may or may not be used for a joint
a. parties that have joint control of a joint
operation.
arrangement (referred to as joint operators or joint
venturers - see discussion below), and
No separate records are maintained
b. parties that participate in, but do not have joint
 Separate books of accounts may not be used
control of, a joint arrangement.
most especially when the joint operation is
relatively short-lived.
Types of joint arrangement b. Joint venture is "a joint arrangement whereby the
parties that have joint control of the arrangement
An entity is required to determine the type of joint have rights to the net assets of the arrangement.
arrangement in which it is involved. The types of joint Those parties are called joint venturers." (PFRS 11.16)
arrangement are:
 The essential elements of a joint arrangement joint operators record only their own
are (1) contractual arrangement and (2) joint transactions in their respective books.
control.
 Joint control is the contractually agreed
sharing of control, such that decisions require
the unanimous consent of the parties sharing
control.
 A joint arrangement can exist even if not all of
the parties have joint control.. It is sufficient
that at least two parties have joint control.
CHAPTER 7
 A joint arrangement is either (a) joint operation CONSTRUCTION
or (b) joint venture.
 A joint arrangement is a joint operation if the
CONTRACTS
parties with joint control have rights to the  Revenue is "income arising in the course of an
assets and obligations for the liabilities of the entity's ordinary activities." (PFRS 15.Appendix
arrangement. A) 100
 A joint arrangement is a joint venture if the  Contract - is "an agreement between two or
parties with joint control have rights to the net more parties that creates enforceable rights
assets of the arrangement. and obligations." (PFRS 15.Appendix A)
 Separate records may or may not be used for a
Customer is "a party that has contracted with an
joint operation.
entity to obtain goods or services that are an output
 If no separate records are maintained, the
of the entity's ordinary activities in exchange for
joint operation transactions are recorded in
consideration." (PFRS 15.Appendix A)
each of the joint operators' individual books.
 If separate records are maintained, the joint Core principle under PFRS 15
operation transactions are recorded in the  An entity recognizes revenue to depict the
separate records in the regular manner. The transfer of promised goods or services to
 customers in an amount that reflects the c. Labor hours expended
consideration to which the entity expects to be d. Machine hours used
entitled in exchange for those goods or e. Time elapsed
services.
Cost-to-cost
Combination of contracts  the percentage of completion is determined as
the ratio of total costs incurred to date over
Each contract is accounted for separately. However, the estimated total contract costs.
two or more contracts entered into at or near the Formula #1:
same time with the same customer (or related parties  Percentage of completion/Total costs incurred
of the customer) are combined and accounted for as a to date Estimated total contract costs
single contract if:
a. The contracts are negotiated as a package with a Formula #2:
single commercial objective;  Total cost incurred to date/ total cost incurred
b. The amount of consideration to be paid in one to date + estimated costs to complete
contract depends on the price or performance of the
other contract; or Adjustments to the measure of progress
c. Some or all of the goods or services promised in  A weakness of the input methods is that there
the contracts are a single performance obligation. may not be a direct relationship between the
inputs and the transfer of control of the asset
Input methods to the customer. In such cases, the inputs used
 Inputs methods recognize revenue on the basis
of efforts or inputs expended relative to the
CHAPTER 8
total expected inputs needed to fully satisfy a ACCOUNTING FOR
performance obligation. Examples of efforts or
inputs include: FRANCHISE OPERATIONS
a. Costs incurred
b. Resources consumed
- FRANCHISOR
 directly to the accounting for franchises. The
specific principles are to be applied in addition
 An entity applies PFRS 15 Revenue from
to the general principles.
Contracts with Customers to account for
 PFRS 15 defines a license as one that
revenues from contracts with customers. PFRS
"establishes a customer's rights to the
15 supersedes PAS 18 Revenue,
intellectual property of an entity." Examples of
licenses of intellectual property include:
Core principle under PFRS 15
a. Software and technology;
 An entity recognizes revenue to depict the
b. Motion pictures, music and other
transfer of promised goods or services to
forms of media and entertainment;
customers in an amount that reflects the
c. Franchises; and
consideration to which the entity expects to be
d. Patents, trademarks and copyrights.
entitled in exchange for those goods or
services.
Franchise
 A franchise is a contractual arrangement under
STEP 1: IDENTIFY THE CONTRACT WITH THE
which the grants the franchisee the right to
CUSTOMER
sell certain products or services, to use certain
STEP 2: IDENTIFY THE PERFORMANCE
trademarks or trade names, or to perform
OBLIGATIONS IN THE CONTRACT
franchisor certain functions, usually within a
STEP 3: DETERMINE THE TRANSACTION PRICE
designated geographical area.
STEP 4: ALLOCATE THE TRANSACTION PRICE
 We deal with franchises everyday: a Jollibee
TO THE PERFORMANCE OBLIGATIONS.
fast-food restaurant, a 711 convenience store,
STEP 5: RECOGNIZE REVENUE WHEN A
an FM radio station, and a public utility vehicle
PERFORMANCE OBLIGATION IS SATISFIED.
are all examples of franchises.
Licensing
Franchises are of two types:
 The "licensing" section of PFRS 15 (par.B52-
1. Contractual arrangement between two private
B63) provides specific principles that relate
entities or individuals.
2 Contractual arrangement between a private entity supply of know-how, initial and subsequent
or an individual and the government. services, and equipment and other tangible
assets.
Satisfaction of performance obligations  Franchise fees come in the form of:
 At contract inception, the entity shall
determine whether the identified performance 1. Initial franchise fee - this is the one-off
obligations will be satisfied either: payment made by the franchisee to the franchisor to
a. Over time; or obtain the franchise right. Initial franchise fees are
b. At a point in time normally paid at the signing of the franchise
agreement and are normally non-refundable. However,
Right to use some franchise agreements allow initial franchise fees
 The customer has the right to use the entity's to be paid over an extended period of time and
intellectual property as it exists at the point in provide for the right of refund up to a certain
time at which the license is granted if the amount.
customer can direct the use of, and obtain 2. Continuing franchise fees - these are the
substantially all of the remaining benefits from, periodic payments made by the franchisee to the
the license at the point in time at which the franchisor for the ongoing franchisee support.
license is granted. Continuing franchise fees are also referred to as
Sales-based or usage-based royalties royalty fees and are usually based on a certain
- Whether a license is distinct or not, and whether percentage of the franchisee's sales, but can also be
a distinct license provides a 'right to access' or 'right set up as a fixed amount or on a sliding scale, and are
to use', revenue from a sales- based or usage-based payable periodically.
royalty is recognized only when (or as) the later of
the following events occurs:
CHAPTER 9
Franchise fees CONSIGNMENT SALES
 Franchise fees refer to the fees that the Consignment arrangements
franchisee agrees to pay to the franchisor in a
franchise agreement. The fees may cover the
  Under a consignment arrangement, an  The "installment sales method" is a special case
entity (called the 'consignor) delivers of revenue recognition that deviates from the
goods to another party (called the revenue recognition principles of PFRS 15. This
'consignee) who undertakes to sell the method may be used for taxation purposes (1)
goods to end customers on behalf of the or when the entity is a "micro entity" (2) and
consignor has opted to use the "income tax basis" of
 A consignor recognizes revenue only when the accounting.
consigned goods are sold to end customers. The (National Internal Revenue Code 'NIRC Sec. 49)
revenue recognized is the gross amount of the  A "micro entity" is an entity that has total
sale price agreed with the consignee. assets or total liabilities below P3,000,000
 Consigned goods are included in the consignor's (SEC guideline on SMEs).
inventory. Freight and other incidental costs of
transferring consigned goods to the consignee
form part of the cost of the consigned goods.
Principal versus Agent considerations
Accounting procedures
 PFRS 15 provides the following additional
 Under the "installment sales method," the gross
guidance in accounting for consignment
profit from an installment sale is initially
arrangements:
deferred and subsequently realized on a
When another party is involved in providing goods or piecemeal basis as the installment payments are
services to a customer, the entity shall determine received using the formula below:
whether it is acting as a principal or an agent.
Realized GP = collection on sale x GP rate
CHAPTER 10
Trade-ins
INSTALLMENT SALES  A seller may accept from a buyer a trade-in of

METHOD old merchandise as part payment for the sale of

new merchandise. Trade-ins under the
Applicability
 "installment sales method" are accounted for as Cost recovery method
follows:  Under the "cost recovery method"* of
a. The traded-in merchandise is debited to traditional US GAAP, no gross profit or
inventory at "fair value." For purposes of applying the interest income is recognized until the total
installment sales method, "fair value" is either: collections from the sale exceed the cost of
i. the appraised value of the traded-in the inventory sold
merchandise; or
ii. the estimated resale price of the traded-in
merchandise less reconditioning costs and normal
CHAPTER 11
profit margin. HOME OFFICE, BRANCH
b. The seller gives the buyer a trade-in value for the AND AGENCY
old merchandise. The trade-in value is the amount
that is treated as part payment of the new
ACCOUNTING
merchandise being sold. There is no accounting
Branch and Agency distinguished
problem if the trade-in value is equal to the fair value
 A sales agency is not a self-contained business
in (a) above. If this is not the case, the seller
but rather acts only on behalf of the home
recognizes either an over allowance or an under
office. On the other hand, a branch is a self.
allowance for the difference.
contained business that acts independently but
➤ If the trade-in value is greater than the fair value,
within the bounds of company policies set by
the difference is debited to an "Over allowance"
the home office.
account. The over allowance is deducted from the sale
price when computing for the gross profit rate. Accounting for an agency
➤ If the trade-in value is less than the fair value, the  Since an agency does not maintain its own
difference is credited to an "Under allowance" separate accounting books, all of its
account. The under allowance is added to the sale transactions are recorded in the home office's
price when computing for the gross profit rate. books. The agency only maintains a simple
 record (e.g., a log book) to account for any general model is modified for onerous
revolving fund, similar to a petty cash fund. contracts, reinsurance contracts held and
investment contracts with discretionary
JOURNAL ENTRY participation features.

HO BRANCH COMBINED The following are presented separately in the

INV. IN CASH - statement of financial position:
BRANCH 
ASSET
CASH PPE
PPE SHIP FR. HO
(a) insurance contracts issued that are assets
SHIP. TO HO 
(b) insurance contracts issued that are liabilities
BR EQUITY ACC
AOI
(c) reinsurance contracts held that are assets; and
(d) reinsurance contracts held that are liabilities.
INV. IN SALES AOI
BRANCH SHIP. TO BR
 Insurance service result is recognized in
HO
INCOME FR. COGS SHIP FR. HO profit or loss. Insurance finance income
BRANCH EXPENSES INV. IN BR and expenses are (a) recognized in full in
INCOME profit or loss or (b) disaggregated into
SUMMARY amounts that are recognized in profit or
loss and OCI, as an accounting policy
CHAPTER 12 choice.

INSURANCE CONTRACT CHAPTER 13

 PFRS 17 provides a general measurement ACCOUNTING FOR BUILD-
model and a simplified model called
'premium allocation approach. The
OPERATE-TRANSFER (BOT)
 on the nature of the consideration in the
contract.
Build-operate-transfer" (BOT) ("service
A financial asset is recognized if the operator
concession arrangement," "rehabilitate-
has a right to receive cash or other financial
operate-transfer," "public-to-private service
assets from the grantor.
concession" or "private-public partnership"
An intangible asset is recognized if the
(PPP) - is an arrangement whereby the
operator has a right to charge users of the
government grants a private entity the right to
public services.
construct and operate an infrastructure for
Borrowing costs are capitalized, subject to the
public services. At the end of the contract, the
provisions of PAS 23, only if the consideration
infrastructure is handed over to the
is an intangible asset.
government.
The common characteristic of all BOT
contracts is that the operator both receives a
right and incurs an obligation to provide public
services.
A BOT contract is accounted for under IFRIC
12 if the government (a) controls/regulates the
services to be provided by the operator; and (b)
controls any significant residual interest in the
infrastructure at the end of the contract.
The operator in a BOT contract acts as a
service provider and accounts for the services
using PFRS 15.
The operator does not recognize the
infrastructure in a BOT contract as a PPE.
Instead, the operator recognizes a financial
asset or an intangible asset or both, depending