Rule 107 of The General Financial Rules 2017 Capitalised Interest Write Back
Original Rule Text
Visual Summary
Interest during project construction met from capital.
Process of adjusting temporary capital funding for interest.
Recovers from project’s capital receipts or surplus revenue.
Executive Summary
Rule 107 of the General Financial Rules, 2017, outlines the procedure for adjusting interest charges that are temporarily funded from capital during a project’s construction phase. Upon the project becoming operational, the capitalised interest must be ‘written back’, meaning it becomes the primary claim on any capital receipts or surplus revenue generated by the project. This ensures proper financial accountability and recovery of initial funding methods.
In-Depth Analysis of the Rule
Introduction: Rule 107 addresses a specific accounting treatment for interest expenses incurred during the construction of a project. Often, large-scale projects require significant capital investment, and interest on borrowed funds during the non-revenue-generating construction period can be substantial. This rule provides guidance on how these costs, if initially met from capital, should be subsequently managed.
Breakdown of the Rule:
- Temporary Capital Funding: The rule applies when, under special Government orders, interest charges incurred during a project’s construction are temporarily financed using capital funds. This means the interest cost is added to the project’s capital cost rather than being expensed immediately.
- Writing Back Capitalised Interest: Once the project is completed and becomes operational (opened for working), the capitalised interest must be ‘written back’. This is an accounting adjustment to reclassify or recover these costs.
- First Charge on Receipts/Revenue: The crucial aspect is that this ‘writing back’ process forms the ‘first charge’ on any capital receipts or surplus revenue generated by the project. This implies that these capitalised interest amounts take precedence in recovery from the project’s earnings or capital inflows once it starts generating them.
Practical Example:
Imagine a government constructs a new power plant. During the 5-year construction period, the project incurs significant interest on loans taken for its development. Under special orders, these interest charges are temporarily capitalised, adding to the total project cost. Once the power plant is commissioned and begins generating electricity and revenue, Rule 107 mandates that the previously capitalised interest must be ‘written back’. This means that the initial revenues or capital receipts from the power plant will first be used to recover these capitalised interest costs before other allocations or profit distributions are considered.
Related Provisions
Rule 107 is part of a broader framework for financial management, particularly concerning capital projects and interest. Other relevant rules include:
- Rule 98 of The General Financial Rules 2017 Capital Expenditure: Defines what constitutes capital expenditure, providing context for the capitalisation of interest.
- Rule 106 of The General Financial Rules 2017 Method of Calculation of Interest: Details how interest is calculated on capital outlay, which directly impacts the amounts subject to Rule 107.
Learning Aids
Mnemonics
- C.I.W.B. – Construction Interest, Write Back: Remember that Construction Interest, if capitalised, must be Written Back as a first charge.
Process Flowchart
Multiple Choice Questions (MCQs)
1. What is the primary condition for writing back capitalised interest under Rule 107 of the General Financial Rules, 2017?
- A) The project generates surplus revenue for five consecutive years.
- B) Interest charges during construction were temporarily met from capital.
- C) The Government issues a general order for all projects.
- D) The project’s total cost exceeds a predefined threshold.
Show Answer
Correct Answer: B) Interest charges during construction were temporarily met from capital.
2. According to Rule 107 of the General Financial Rules, 2017, what forms the “first charge” on any capital receipts or surplus revenue derived from the project?
- A) Project operational expenses.
- B) Repayment of the principal loan amount.
- C) The writing back of capitalised interest.
- D) Dividends to shareholders.
Show Answer
Correct Answer: C) The writing back of capitalised interest.
3. When does the process of writing back capitalised interest occur, as per Rule 107 of the General Financial Rules, 2017?
- A) At the beginning of the project construction.
- B) Annually, regardless of project status.
- C) When the project is opened for working.
- D) After all other project liabilities are settled.
Show Answer
Correct Answer: C) When the project is opened for working.
4. Rule 107 of the General Financial Rules, 2017 deals with interest charges that are temporarily met from which source during project construction?
- A) Revenue account.
- B) Contingency Fund.
- C) Capital.
- D) Public Account.
Show Answer
Correct Answer: C) Capital.
5. Which of the following is NOT a source from which capitalised interest is written back under Rule 107 of the General Financial Rules, 2017?
- A) Capital receipts from the project.
- B) Surplus revenue derived from the project.
- C) General government revenue.
- D) Special orders of Government.
Show Answer
Correct Answer: C) General government revenue.
Frequently Asked Questions
What does “writing back capitalised interest” mean under Rule 107 of the General Financial Rules, 2017?
It refers to the accounting process of recovering or adjusting interest charges that were initially added to the capital cost of a project during its construction phase, once the project becomes operational. This ensures these temporary capital funds are accounted for against the project’s subsequent earnings.
Why is capitalised interest made the “first charge” on project receipts according to Rule 107 of the General Financial Rules, 2017?
Making it the “first charge” ensures that the funds temporarily used from capital to cover interest during construction are prioritized for recovery from the project’s own capital receipts or surplus revenue once it starts generating income. This maintains financial discipline and ensures the initial capital outlay is properly recouped.
Key Takeaways
- Rule 107 governs the accounting treatment of interest charges temporarily met from capital during project construction.
- The ‘writing back’ process is initiated when the project becomes operational.
- Capitalised interest forms the ‘first charge’ on the project’s capital receipts or surplus revenue.
- This rule ensures proper recovery and financial accountability for initial project funding methods.
Conclusion
Rule 107 of the General Financial Rules, 2017, is a critical provision for managing the financial intricacies of large-scale government projects. By stipulating the ‘writing back’ of capitalised interest as a first charge on project revenues, it reinforces principles of fiscal prudence and ensures that the true costs of project development are systematically recovered, contributing to sound financial management within government operations.