Interest in the Under Construction Phase 

Use

In certain countries, you are required to calculate interest on capital invested in an asset under construction, either for management accounting purposes or due to legal requirements. This interest should then be fully or partially capitalized on the capital investment measure.

Features

Therefore, the R/3 IM component makes it possible to calculate interest automatically. You can also capitalize the interest differently in different depreciation areas on the asset under construction. However, you can only calculate interest for investment measures that are managed as projects (not orders).

You make the system settings for this in Customizing for the Project System. Choose Project System ® Costs ® Automatic and Periodic Allocations ® Interest Calculation.

If you only need interest for management accounting purposes (not for capitalization), you can use the corresponding functions in the Asset Accounting (FI-AA) component. There you can calculate interest for the asset under construction belonging to an investment measure. This calculation takes place during the calculation of depreciation, using an appropriate interest key. You can then make account assignment of this interest to an interest account and to a CO receiver, usually a cost center.

Interest Indicator

You specify the rules for the calculation of interest using an interest indicator. You enter general conditions in the indicator, such as calendar and calculation of compound interest. You can also enter the following time-dependent conditions:

If you do not enter a benchmark interest rate, the system automatically uses only the additional interest rate for calculating interest amounts.

Interest Profile

Under certain conditions, you may calculate interest for a project in parallel in two different ways with different conditions. This interest would then be posted to two different accounts. You specify the interest indicator to be used for these calculations in the interest profile. The key for this interest profile can then be entered in the WBS element, with a default supplied by the project definition or the project profile.

In addition to the conditions in the interest indicator, you can make specifications in the interest profile. The following specifications can be entered in the interest profile for calculating interest to be capitalized on a project:

Graphic: Customizing Settings for Calculating Interest

Graphic: Interest Profile with Several Percentage Rates

Cost Element for Interest

For the calculation of interest, you also have to specify the cost elements that are relevant for interest. To this end, you can group cost elements together into value categories. When you assign these value categories to an interest profile, they become interest-relevant.

Interest is posted with a cost element. You specify this cost element in Customizing for the Project System by assigning an account symbol. Choose Project System ® Costs ® Automatic and Periodic Allocations ® Interest Calculation ® Update Control ® Maintain Cost Elements for Interest Calculation. In the allocation structure of the investment measure, you can then specify the depreciation areas of the accompanying asset under construction, in which these cost elements should be capitalized, and how much should be capitalized in each area. (Refer to Periodic Settlement to an Asset under Construction.) This procedure allows you to capitalize interest in certain depreciation areas, while not capitalizing it in others. If you do not make any specifications for the interest cost element, the system capitalizes interest automatically in all depreciation areas.

Calculation of Interest

The system calculates interest to the day on the balance of debits/credits and full settlements to a WBS element. If a periodic settlement is made to an asset under construction, the system calculates interest only on the values that have been capitalized to the asset under construction. The basis for the calculation is the depreciation area that is specified in the interest profile. Interest is not calculated on amounts that were settled as costs to CO receivers, or transferred to nonoperating expense.

The system takes internal activity into account on the posting date. For external activity, you have a choice. You can choose either the actual payment amounts, with their respective value date (regardless of the posting date of the actual debit), or the posting date (PS Customizing: Choose Project System ® Costs ® Automatic and Periodic Allocations ® Interest Calculation ® Define Interest Profile ® Define Interest Relevance). Interest is calculated on down payments starting from the date of the down payment. On the other hand, you can carry out final settlement for external activity with long payment terms before the payment is actually made, so that no interest at all is calculated.

After a complete full settlement, the WBS element has a balance of zero, so that interest is not calculated after this point.

In order to prevent negative interest from being calculated for a project, do not define credit interest percentages in Customizing for the interest indicators used.

Compound Interest

By means of the cost element used for posting interest, you specify whether the system calculates compound interest. If you do not want to calculate compound interest, you have to select a cost element that is defined as not relevant for interest. If you do want the system to calculate compound interest, you have to select a cost element that provides for interest. You specify the interest relevance of value categories in IM Customizing. A value category is a combination of several cost elements (for example commitment items). Choose Project System ® Costs ® Value Categories.

You use the interest profile to specify the intervals at which compound interest should be calculated. You might use an interest profile that has several interest indicators in the depreciation area that is the basis for the calculation of interest. If one or more of these interest indicators specifies the calculation of compound interest, then the following applies:

If you want to calculate compound interest on all the interest of the various interest indicators in the depreciation area, you have to use the same cost element (that allows for interest) for these interest indicators when you post the interest. On the other hand, you have to use different cost elements, if you calculate compound interest only on interest that was calculated using the same interest indicator.

When defining the period control for compound interest in Customizing of the Project System, keep in mind the following:

Even in a shortened fiscal year, you have to enter the last period of the "normal" fiscal year as the last period of the fiscal year (that is, the number of posting periods that are entered in the definition of the fiscal year variant). This means that in a shortened fiscal year, you would enter '12' as the last period, if your normal fiscal year had 12 periods.

Period control for compound interest always calculates compound interest, at the latest, starting in the first period of the next fiscal year. Therefore the system requires an entry for the last day of the fiscal year, which also designates the last period of the fiscal year.

Interest in Summary Settlements

By making the appropriate definition in the investment profile, you can perform a summary settlement of investment measures (refer to Control Functions of the Investment Profile). Only a limited calculation of interest is possible for these investment measures since the system cannot precisely determine the line items settled to the asset under construction and therefore relevant for interest. However, the following solutions are possible:

A function for exactly calculating interest for summary settlement is under development.