Calculating Interest

This chapter provides an overview of interest calculations and discusses how to:

Establish period calculation factors.
Set up and process interest calculations.

Understanding Interest Calculations

This section discusses:

Interest calculation formula.
Basic steps to set up and calculate interest.

Interest Calculation Formula

You calculate interest during construction—Allowance for Funds Used During Construction (AFUDC)—to capitalize the cost of company funds that are used over the course of a project. Interest is calculated based on this formula:

Interest During Construction = (Cost Accumulation*) × (Periodic Interest**)

*Accumulated costs based on a specified method of accumulation.

**Yearly interest rate divided by the number of periods in the fiscal year.

Basic Steps to Set Up and Calculate Interest

The basic steps to set up and calculate interest are:

(Optional) Define interest types at the setID level.

See Defining Interest Types.
Establish period calculation factors at the setID level.
Define interest calculations at the business unit level.
Identify projects and activities to include interest calculations.
Establish status-based interest calculation factors.
Accumulate transactions in the Project Transaction table (PROJ_RESOURCE).
Run the interest calculation process.

Establishing Period Calculation Factors

To establish period calculation factors, use the Period Calculation Factors component (PROJ_INT_DETP).

This section discusses how to define period calculation factors.

Pages Used to Establish Period Calculation Factors

Page Name	Object Name	Navigation	Usage
Period Calculation Factor	PROJ_INT_CAL_DETP	Setup Financials/Supply Chain, Product Related, Project Costing, General Options, Period Calculation Factors, Period Calculation Factor	Define period calculation factors for specified time periods.

Defining Period Calculation Factors

Access the Period Calculation Factor page.

Period calculation factors are based on general ledger calendars. Select a period in the general ledger calendar and specify the dates for which you want to accumulate costs, and the factor by which you want those costs to be multiplied.

From Date and Through Date

Enter the period of time that the system uses to calculate interest. Interest is calculated on costs that are incurred during the period that you specify. Add rows to enter additional date ranges.

Period Factor

Enter the percentage of costs that the system uses to calculate interest. Interest is calculated on the specified percentage of the costs incurred—usually 100 percent—during the specified date range.

Use a decimal fraction to enter a percentage that is less than 100 percent. For example, enter .5 for 50 percent.

The next two sections provide examples of period calculation factors that are set up by using the straight average method and FASB 34 method of accumulating costs.

Example of Period Calculation Factor Straight Average Method

The Straight Average method uses this formula:

Costs = (Beginning Costs* + Ending Costs**) ÷ 2

*Total costs for the project up to the beginning of a period.

**Total costs for the project through the end of the same period.

For example:

Variable	Value
Project Length	4 years (2002–2005)
Current Date Range	1/1/2004 – 12/31/2004
Calendar Type	Months
Current Date	4/6/2004
Spending Prior to Current Fiscal Year	1,000,000 USD
Spending for Current Year	January: 12,000 USD February: 15,500 USD March: 13,400 USD

Using the Straight Average method, the project cost accumulation calculations for March, 2004 are:

(1,027,500 + 1,040,900) ÷ 2 = 1,034,200

The following page illustrates period calculation factors that are set up for the Straight Average example just discussed. The last period, March, is assigned a value of 0.5 (50 percent) to reflect the assumption that half of the costs were incurred in the first half of the month, and the other half were incurred in the last half of the month.

FASB 34 Method

The FASB 34 method calculates a weighted average of costs using the following formula:

Cost Accumulation = (Prior Costs*) × (Weighted Current Year Costs**)

*Project-to-date costs prior to the current date range.

**Sum of the weighted average costs for each completed period in the current date range.

Using the FASB 34 method, the project cost accumulation calculations for March 2005 (using the example above) are:

((1,000,000 + 12,000 × 12 ÷ 12) + (15,500 × 11 ÷ 12) + (13,400 × 10 ÷ 12)) = 1,037,375

The following page illustrates period calculation factors that are set up for the FASB 34 example just discussed:

Setting Up and Processing Interest Calculations

This section discusses how to:

Define interest calculations.
Identify projects for interest calculations.
Identify activities for interest calculations.
Establish status-based interest calculation factors.
Process interest calculations.

Pages Used to Set Up and Process Interest Calculations

Page Name	Object Name	Navigation	Usage
Interest Calculation	PROJ_BU_INTEREST	Setup Financials/Supply Chain, Business Unit Related, Project Costing, Project Costing Options, Interest Calculation	Define interest calculations for the business unit.
Project Costing Definition	PROJECT_GEN_01	Project Costing, Project Definitions, General Information, Project Costing Definition	Select the option to include project costs in interest calculations, which is used as the default for all new activities that are created for this project.
Project Definitions - Status	PROJECT_STATUS	Project Costing, Project Definitions, Status, Status	Specify interest calculation factors based on a project's status.
Activity Definitions - Definition	PROJECT_ACTIVITY	Project Costing, Activity Definitions, General Information, Definition	Select the option to include activity costs in interest calculations.
Calculate Interest	PC_INTEREST	Project Costing, Utilities, Calculate Interest, Calculate Interest	Calculate interest and insert new rows into the Project Transaction table based on selected criteria.

Defining Interest Calculations

Access the Interest Calculation page.

Interest Type

Defines the type of interest calculated for a project in the business unit. You can enter more than one kind of interest to be calculated, such as debt and equity interest.

Calendar

Select the period calculation factors that are set up for the general ledger.

Interest Rate

Enter the yearly interest rate. The system calculates the periodic interest rate based on the yearly interest rate ÷ number of calendar periods.

Analysis Group

Enter the analysis group that contains the analysis types that are used as the basis for interest calculation. The analysis group typically includes all costs.

Target Interest Row Attributes

Enter the analysis type, source type, category, and subcategory as the attributes to identify new rows that are generated by interest calculations.

Important! The system performs compound interest calculations on all source types, except the ones that you enter in the Transaction Exclusions group box. You can exclude any source types from the cost accumulation. For example, if you are not allowed to include previous interest in calculating future interest, you can exclude previous interest from the cost accumulation

Transaction Exclusions

Source Type	Select the source types to exclude from cost accumulation. Enter multiple source types as required.
Exclusion From Date and Exclusion Through Date	Enter a date range for each excluded source type. This date range identifies the period of time for which a source type is excluded.

Identifying Projects for Interest Calculations

Access the General Information - Project Costing Definition page.

To include project costs in interest calculations, select Allow Interest Calculation on the General Information - Project Costing Definition page.

If you include costs at the project level:

The system automatically includes costs that are incurred by all activities belonging to that project for interest calculations.

Only those projects with a processing status of Active are eligible for interest calculation. After the PC Interest Application Engine process (PC_INTEREST) selects those projects with an active processing status, only those activities with a processing status of Active are eligible for interest calculation.
The Allow Interest Calculation option is selected by default on all subsequent activities created for this project

Identifying Activities for Interest Calculations

Access the Activity Definitions - Definition page.

To include individual activity costs in interest calculations, select Allow Interest Calculation on the Activity Definitions - Definition page.

Establishing Status-Based Interest Calculation Factors

Access the Project Definitions - Status page.

Use this page to define interest calculation factors for a specific project based on the project's status. For example, you can configure the system to recognize 100 percent of the calculated interest for a project in Open status, and 50 percent of the calculated interest for the project in an In Service status.

To define interest calculation factors that are based on status, enter an interest calculation factor for a status on the Project Definitions - Status page. Enter the value in decimal form, such as 1.0 for 100 percent, with a maximum of one digit on either side of the decimal point.

Processing Interest Calculations

Access the Calculate Interest page.

The data in this run control page shows the final step to calculate interest for the examples in the Defining Period Calculation Factors section in this chapter.

Option

Select to calculate interest for all projects and activities, or for specific ones. Options are:

All: Interest is calculated for all projects and activities.

Business Unit: Interest is calculated for the selected business unit.

Business Unit/Project: Interest is calculated for the selected business unit and project.

Business Unit/Project/Activity: Interest is calculated for the selected business unit, project, and activity.

Application Options

Enter the beginning and ending fiscal year dates, and the beginning and ending period, for which you want to calculate interest.

Click Run to initiate the PC Interest Application Engine process. The system adds a row for the calculated interest to the Project Transaction table with a General Ledger Posting Status flag (GL_DISTRIB_STATUS) value of N (not yet posted).

Interest Type	Defines the type of interest calculated for a project in the business unit. You can enter more than one kind of interest to be calculated, such as debt and equity interest.
Calendar	Select the period calculation factors that are set up for the general ledger.
Interest Rate	Enter the yearly interest rate. The system calculates the periodic interest rate based on the yearly interest rate ÷ number of calendar periods.
Analysis Group	Enter the analysis group that contains the analysis types that are used as the basis for interest calculation. The analysis group typically includes all costs.
Target Interest Row Attributes	Enter the analysis type, source type, category, and subcategory as the attributes to identify new rows that are generated by interest calculations.