Advanced Accounting · AS 29 (Revised) Provisions, Contingent Liabilities and Contingent Assets

AS 29: Onerous Contracts and Restructuring Provisions

Updated 4 October 2026 · Fact-checked

Under AS 29 you recognise a provision only if there is a present obligation from a past event, an outflow is probable, and a reliable estimate exists. Apply this to onerous contracts (provide the lower of cost of fulfilling and cost of exit), restructuring (needs a detailed plan and valid expectation) and warranties. Never provide for future operating losses.

Understand Applying Recognition Rules: Onerous Contracts and Restructuring

AS 29 has one test for every provision: a present obligation arising from a past event, a probable outflow of resources (more likely than not), and a reliable estimate. If any part fails, you do not book a provision. You may disclose a contingent liability instead, unless the outflow is remote.

An onerous contract is one where the unavoidable cost of meeting the obligations exceeds the economic benefits expected from it. The contract itself is the past event. You recognise a provision for the present obligation, measured at the lower of the cost of fulfilling the contract and any compensation or penalty for failing to fulfil it. Unavoidable cost means the least net cost of exiting, so do not count costs you can avoid.

A restructuring is a programme planned and controlled by management that materially changes the scope of the business or the manner it is conducted. A board decision alone is not enough. You need a detailed formal plan and a valid expectation in those affected that it will be carried out, either by starting to implement it or by announcing its main features to them. Only then is there a constructive obligation. If the restructuring involves a sale of an operation, there is no obligation until there is a binding sale agreement.

A restructuring provision includes only the direct expenditure arising from the restructuring: necessarily entailed by it and not associated with ongoing activities. So include termination payments and contract cancellation penalties. Exclude retraining or relocating continuing staff, marketing, and investment in new systems. Also exclude identifiable future operating losses up to the restructuring date.

Future operating losses never meet the definition of a liability because there is no past event. No provision is made. The expectation of losses may be an indicator of impairment, which is tested under AS 28.

A warranty given at sale creates a present obligation from a past event, the sale. Because many similar items are involved, you assess the obligation as a class, using expected values. A provision is made if the outflow for the class is probable. Decommissioning-type obligations (for example, site restoration) are provided when the obligation arises from a past event, such as installation or damage already caused. The amount is the best estimate of the expenditure needed to settle it.

Key rules to remember

Recognition test: Provision = present obligation (past event) + outflow probable + reliable estimate; All three conditions must be met. Otherwise disclose a contingent liability, unless the outflow is remote.
Onerous contract provision: Provision = lower of (cost of fulfilling the contract, penalty or compensation for non-fulfilment); Use net unavoidable cost: unavoidable cost less the expected benefits from the contract. Impairment of assets dedicated to the contract is recognised first.
Restructuring provision: Provision = direct expenditure necessarily entailed by restructuring and not associated with ongoing activities; Needs a detailed formal plan and a valid expectation in those affected. Exclude retraining, relocation, marketing and new-system investment.
Future operating losses: Provision for future operating losses = nil; No present obligation from a past event exists.
Warranty expected value: Expected cost = Σ (probability × cost of each outcome); Use for a large population of similar items, such as warranties.

How to solve Applying Recognition Rules: Onerous Contracts and Restructuring questions

Use the same sequence for any AS 29 recognition question. Decide first whether a provision exists, then how much.

1Identify the event the question relies on: a contract signed, a sale, a plan announced, damage caused or only a board decision.
2Test for a present obligation (legal or constructive) arising from a past event at the balance sheet date. Events after the date do not create it.
3Test whether the outflow is probable and whether a reliable estimate exists.
4For restructuring, check for a detailed formal plan and a valid expectation (announced or begun) before the balance sheet date.
5If a provision is allowed, measure it at the best estimate. For onerous contracts take the lower of fulfilment cost and exit penalty. For warranties use expected values.
6Remove excluded items: future operating losses, ongoing-activity costs, retraining and relocation of continuing staff.
7Pass the entry: debit Statement of Profit and Loss, credit Provision. State the reason in one line, and mention disclosure where relevant.

Quickest way: Obligation first, then amount

When to use it: Use this in the MCQs and in the first minute of any written question on provisions.

MCQs: ask only whether a past event has created an obligation at the balance sheet date. If not, eliminate any option that books a provision.
Eliminate any option that provides for future operating losses or for a board decision with no announcement.
For onerous contracts, compute both numbers (fulfil and exit) and pick the lower.
Written answers: write the three conditions, apply each to the facts, then compute. This format earns step marks even if the figure slips.
Close with one line of conclusion and the journal entry.

Common mistakes in Applying Recognition Rules: Onerous Contracts and Restructuring

Providing for a restructuring because the board approved it.
Students treat a decision as a commitment.
Fix: Check for a detailed formal plan plus a start of implementation or an announcement to those affected before the balance sheet date.
Including retraining, relocation or marketing costs in the restructuring provision.
These costs sound like they belong to the restructuring.
Fix: Include only direct expenditure not associated with ongoing activities, such as termination payments.
Providing for expected future operating losses.
Prudence is misread as always provide.
Fix: Prudence does not override the definition of a liability. No past event means no provision.
Taking the full fulfilment cost as the onerous contract provision.
Students forget the benefits expected from the contract and the exit option.
Fix: Use the lower of net cost of fulfilling and the penalty for exit.
Assessing warranties item by item and providing nil because each claim is unlikely.
Probability is applied to a single unit instead of the class.
Fix: Assess the class of similar obligations and use expected values.
Counting events after the balance sheet date as creating the obligation.
Timing of the announcement is overlooked.
Fix: Check the date. If the plan was announced after the balance sheet date, make no provision at the balance sheet date. It is a non-adjusting event under AS 4 (Contingencies and Events occurring after the Balance Sheet Date), and you disclose it if it is material.

Worked examples

Example 1

X Ltd has a contract to supply 1,000 units at ₹300 per unit. Cost to complete the contract is ₹3,50,000. If X Ltd cancels the contract, it must pay a penalty of ₹40,000. Show the provision required at the year end. Assume no assets are dedicated to the contract.

Show the solution

The contract is onerous because unavoidable cost exceeds expected benefit. Revenue is 1,000 × ₹300 = ₹3,00,000, while cost is ₹3,50,000.
Net cost of fulfilling = ₹3,50,000 − ₹3,00,000 = ₹50,000.
Cost of exit = penalty ₹40,000.
Provision is the lower of ₹50,000 and ₹40,000 = ₹40,000.
Note: if any assets were dedicated to this contract, you would first recognise any impairment loss on them, and only then make the onerous provision. Here there are none.
Entry: Statement of Profit and Loss Dr ₹40,000 to Provision for onerous contract Cr ₹40,000.

Answer: Provision for the onerous contract is ₹40,000.

Example 2

On 10 March 2027, the board of Y Ltd decided to close one division and prepared a detailed formal plan. Employees were told on 20 March 2027 and the plan was announced. Estimated costs: termination payments ₹12,00,000; retraining of continuing staff ₹3,00,000; relocation of continuing staff ₹2,00,000; expected operating losses of the division till closure ₹5,00,000. The year ends 31 March 2027. Compute the provision.

Show the solution

Check the obligation: a detailed formal plan existed and the main features were announced to those affected on 20 March 2027, before the balance sheet date. A constructive obligation exists.
Include direct expenditure necessarily entailed by the restructuring: termination payments ₹12,00,000.
Exclude retraining ₹3,00,000 and relocation ₹2,00,000, as they relate to continuing staff and ongoing activities.
Exclude future operating losses ₹5,00,000, as there is no present obligation for them.
Provision = ₹12,00,000. Entry: Statement of Profit and Loss Dr ₹12,00,000 to Provision for restructuring Cr ₹12,00,000.
Date check: had the announcement been made after 31 March 2027, no provision would be made at the balance sheet date. It would be a non-adjusting event under AS 4, disclosed if material.

Answer: Provision for restructuring is ₹12,00,000.

Exam tips

Always state the three recognition conditions in writing before computing. Examiners give marks for the reasoning.
Read dates carefully in restructuring questions. Announcement before the balance sheet date makes the difference between a provision and no provision.
In lists of costs, tick each as included or excluded with a one-line reason. This is a common test format.
For onerous contracts, compute both the fulfilment and exit figures and show the comparison.
In MCQs, any option that provides for future operating losses is almost certainly wrong.

Practice questions from AS 29 (Revised) Provisions, Contingent Liabilities and Contingent Assets

Applying Recognition Rules: Onerous Contracts and Restructuring in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Applying Recognition Rules: Onerous Contracts and Restructuring: frequently asked questions

Can I make a provision for future operating losses under AS 29?

No. Future operating losses have no past event and so no present obligation. You may need to test related assets for impairment under AS 28.

When is a restructuring provision recognised?

When you have a detailed formal plan and have raised a valid expectation in those affected, by starting implementation or announcing the main features. This must happen by the balance sheet date. The provision covers only direct expenditure from the restructuring. If the plan is announced after the balance sheet date, it is a non-adjusting event under AS 4: no provision is made, and you disclose it if material.

How do I treat a warranty provision under AS 29?

The sale is the past event. Assess the obligation for the whole class of items sold and estimate the cost using expected values. If an outflow is probable for the class, provide for it.

How is an onerous contract provision measured?

Measure it at the lower of the net cost of fulfilling the contract and the penalty or compensation for exiting it. This reflects the least unavoidable cost. Any impairment of assets dedicated to the contract is recognised first.