1.20 Query Accounting for interest earned during the construction period.
1. A public sector company, under the administrative control of the Department of Atomic Energy (DAE), Government of India, is engaged in mining and processing of uranium in the country. DAE had sanctioned capital cost of Rs. 495.54 corers for setting up of new uranium mines and a processing plant. DAE approved the same amount of the funds even before the receipt of administrative approval of the project for building of infra-structural facilities in the project area. The project was approved during April 1989. The debt-equity ratio stipulated in the administrative approval was 1:1. It was also stated in the same approval that the company will first draw funds as equity. The company so far has drawn a portion of the equity only.
2. While implementing the project, the company faced problems in respect of acquisition of land, rehabilitates of persons who have been evacuated on acquisition of land by the company, political unrest creating disturbances, viz., harassment, gherao, personal assaults, etc. This caused delay in implementation of the project. As a consequance, the company could not utilise funds drawn from DAE as per the targets. This resulted in non-utilisation of the funds drawn for the propose of the projects. The said money was deposited in various schemes of nationalised banks including the capital service. The interest earned on such investments was credited to Expenditure During Construction Account, and capitalised so that a portion of the cost overrun (because of time overrun) could be compensated and net cost of the project could be ascertained.
3. The statutory auditors of the company felt differently about the issue. Their report on the accounts for the year 1991-92, contained the following remark in this regard:
“Note 15 regarding interest earned on fixed deposits being capitalised by reducing the value of capital work-in-progress and income. In our opinion, this is contrary to the applicable authoritative professional view. Consequently, profits and capital work-in-progress are understated.”
4. The note to the accounts, as referred to by the statutory auditors, states as below:
“Interest earned on temporary investment of surplus funds received for planned projects credited to Project Accounts and treated as income received during the construction stage in accordance with the normally accepted accounting principles.”
5. The querist has informed that the accounting treatment followed by the company in this regard has been objected by the C. & A.G.
6. The querist has sought the opinion of the Expert Advisory Committee as to whether the accounting policy being followed by the company in capitalising interest earned during the construction period is correct or not.
Opinion May 4, 1993
1. The Committee notes paragraph nos. 8.1, 15.2 and 17.11 of Guidance Note on Treatment of Expenditure During Construction Period, (1993 Edition) published by the Research Committee of the Institute of Chartered Accountants of India, which read as follows:
“8.1 It is possible that a new project may earn some income from miscellaneous sources during its construction or pre-production period. Such income may be earned by way of interest from the temporary investment of surplus funds prior to their utilisation for capital or other expenditure or from sale of products manufactured during the period of test runs and experimental production. Such items of income should be disclosed separately either in the profit and loss account, where this account is prepared during construction period, or in the account/statement prepared in lieu of the profit and loss account, i.e., Development Account/Incidental Expenditure During Construction Period Account/Statement on Incidental Expenditure During Construction (Refer to para 14.7). The treatment of such incomes for arriving at the amount of expenditure to be capitalised/deferred, has been dealt with in para15.2.”
“15.2 From the total of the aforesaid items of indirect expenditure would be deducted the income, if any, earned during the period of construction, provided it can be identified with the project.”
“17.11 During the construction period, a project may earn income from miscellaneous sources- for example, interest income, income from hire of equipment or assets and income from sale of products manufactured during the period of test runs and experimental production. It is recommended that where such income can be identified with the project, it should be deducted from the total of the indirect expenditure so that only the net amount of the expenditure is capitalised or treated as deferred revenue expenditure, as the case may be (paragraph 15.2). In either case, consideration may have to be given to the question of providing for the income tax liability on such income (paragraph 8.2).”
2. The Committee notes from the facts of the query that the equity funds in question appear to have been specifically drawn for the project and, therefore, are identifiable with the project. The Committee, on the basis of the recommendations made in Guidance Note, as reproduced at para 1 above, is of the opinion that the interest earned on the said surplus funds should be deducted from the project cost. __________________________________ |