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

Ganesh Pharma Ltd. decided on 20 March 2026 to close one of its divisions. The detailed formal plan was approved by the board, but it was not announced to employees or others and no implementation had begun by 31 March 2026. The expected restructuring cost is Rs 45 lakh. What is the appropriate treatment in the financial statements for the year ended 31 March 2026?

No provision should be made. A restructuring provision needs a constructive obligation, which arises only when a detailed formal plan exists and those affected are validly led to expect it through announcement or start of implementation. A board decision alone, kept confidential, does not create that obligation.

  1. AProvide Rs 45 lakh since the board approved the plan
  2. BProvide half the cost, Rs 22.5 lakh, as the plan is approved but not implemented
  3. CDisclose Rs 45 lakh as a contingent asset
  4. DMake no provision as no constructive obligation has arisenCorrect

Explanation

A restructuring provision requires a detailed formal plan and a valid expectation in those affected, created by starting implementation or announcing the main features. A board decision alone does not create a constructive obligation. Hence no provision arises at 31 March 2026, so providing Rs 45 lakh is wrong.

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