Expert Advisory Committee
ICAI-Expert Advisory Committee
Options:

Query No. 6

Subject:   

Treatment of interest earned on idle project funds.1

 A. Facts of the Case

 

1.  A government company is engaged in mining activities.  The company is receiving funds from the Government of India in the form of equity for financing its ongoing capital projects.  The idle funds which are not utilised immediately are invested in short-term deposits/intercorporate loans.

 

2. The final product of the company is compulsorily acquired by the Government of India.  The compensation rate for this purpose is fixed by the government.  As per the formula for fixation of the compensation rate, interest (or other similar income) earned by the company is credited to the cost of production without making any distinction between earnings from investment of project funds and those from investment of operation funds.  To the resultant figure, a return on capital employed is added to arrive at the compensation rate.

 

3. The interest earned on a specific project fund during the year 1998-99 was duly credited to the cost of production to arrive at the compensation rate which was approved by the Government of India in due course.  The interest was shown as revenue income in the accounts for the said year.  According to the querist, during the audit of the accounts, the government auditors observed that the interest earned on a specific project fund was directly attributable to the project and should be adjusted against the project cost instead of being treated as a revenue income.

 

4. The management is of the view that since the entire interest income is adjusted against the cost of production to determine the compensation rate, the appropriate treatment of interest earned on project funds is to treat it as revenue income rather than to reduce the interest from capital work-in-progress.

 

B. Query

 

5. The querist has sought the opinion of the Expert Advisory Committee as to whether the company is correct in treating the interest earned on a specific project fund as revenue income.

 

C.   Points Considered by the Committee

 

6. The Committee notes from the facts of the query that the final product of the company is compulsorily acquired by the government at the compensation rate fixed by the government.  The Committee also notes that in determining the compensation rate, any interest (or other similar income) earned by the company from investment of idle funds is deducted from the cost of production.

 

7.  The ‘Guidance Note on Treatment of Expenditure During Construction Period’, issued by the Institute of Chartered Accountants of India, recommends that interest from investment of idle project funds should be adjusted in the capital cost of the project (paragraphs 8.1, 15.2 and 17.11). The Committee is of the view that this general principle is not applicable in the present case due to its special circumstances.  As mentioned earlier, interest arising from investment of idle project funds (as well as other funds) is reduced from the cost of production and a return on capital employed is added to the resultant figure to determine the compensation rate for the final product.  Thus, there is a clear nexus between interest earned and sale proceeds from the final product.  The higher the interest earned, the lower the sale proceeds, and vice versa.  The Committee is of the view that the accounting treatment of interest should clearly reflect its nature as discussed above.

 

8. Based on the above, the Committee is of the view that interest earned by the company on investment of idle funds should be treated as of revenue nature and shown separately in the financial statements, if material. The Committee is of the view that under the facts and circumstances of the case, adjusting the interest earned on investment of idle project funds against the project cost would not be appropriate.

 

D. Opinion

 

9. On the basis of the above, the Committee is of the opinion that the company is correct in treating the interest income from temporary investment of idle project funds as revenue income and not adjusting it against the project cost.

 

1Opinion finalised by the Committee on 22.4.2000.