By Ravi Shankar, PgMP, PMP, PMI-RMP and PMI-SP
For large construction projects, interest incurred during the construction period for borrowed capital is typically capitalized for the duration of project construction, until the Capital Asset is generated. In Oracle E-Business Suite Applications, the Capital Projects functionality supports these requirements. To utilize this functionality you would set up an Interest Schedule (similar to a Burden Schedule) and associate it with the project type of the Capital Project. This schedule provides for the association of interest name, interest rate for the organization and other relevant details for interest calculations, compounding effect, expenditure type exclusions, etc.
Oracle Projects generates the interest to be capitalized once per project for each General Ledger period. Based on the system linkage function of the expenditure type to be used for interest (generally it is the Miscellaneous type class), the appropriate auto accounting function and SLA need to be properly configured to ensure the interest capitalized gets posted in the GL appropriately. Capitalization interest calculation is for the differential expenditure items on a cumulative basis, i.e. until the Construction In Process (CIP) is ready to be capitalized or Asset lines are ready to be generated. Once generated and transferred to Assets, the process stops generating interest on those expenditure items. Interest is capitalized at the same task level as the expenditure item.
For tasks that don’t have specific Asset Assignments, i.e. tasks used to accumulate Common Costs for the project, Oracle EBS Projects provides various allocation methods so that the Asset generation process does not create Unassigned Asset lines. The interest capitalization process is run at month end, before generating asset lines. The Asset line generation process does not show the interest capitalization amount in the CIP.