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

Ananya Ltd. decided on 20 March to close a division and its board approved a detailed formal plan. Employees were told on 28 March. Estimated costs: employee termination Rs 8,00,000; retraining of continuing staff Rs 2,00,000; relocation of continuing staff Rs 1,50,000; future operating losses of the division till closure Rs 3,00,000. The financial year ends 31 March. What restructuring provision should be recognised?

The provision is Rs 8,00,000. Because the detailed plan was announced before year-end, a constructive obligation exists, but only termination costs qualify. Retraining, relocation and future operating losses relate to ongoing activities and cannot be provided for under AS 29.

  1. ARs 14,50,000
  2. BRs 8,00,000Correct
  3. CRs 11,00,000
  4. DRs 10,00,000

Explanation

A constructive obligation exists as the plan was announced before the year-end. Only direct expenditure necessarily entailed by restructuring and not associated with ongoing activities is included: termination Rs 8,00,000. Retraining, relocation and future operating losses relate to continuing activities or future operations and are excluded.

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