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

Kaveri Engineering Ltd. decided on 20 March to close one of its plants. The board approved a detailed formal plan on 25 March, and on 28 March the plan was announced to the affected employees and their representatives, who were told the closure would be effective 30 June. The year ends 31 March. Estimated costs: employee termination Rs 12 lakh, retraining of continuing staff Rs 4 lakh, and future operating losses of the plant Rs 6 lakh. What provision should be made at 31 March?

The provision is Rs 12 lakh. The plan was announced before year end, so a constructive obligation exists. Only termination costs qualify as direct restructuring expenditure; retraining continuing staff and future operating losses relate to ongoing activities and cannot be provided for under AS 29.

  1. ARs 22 lakh
  2. BRs 16 lakh
  3. CRs 12 lakhCorrect
  4. DNil, as the closure takes effect after the year end

Explanation

A detailed formal restructuring plan was announced before the balance sheet date, creating a constructive obligation. A restructuring provision includes only direct expenditure necessarily entailed by the restructuring and not associated with ongoing activities. Termination costs of Rs 12 lakh qualify; retraining of continuing staff and future operating losses do not. Including them (Rs 16 lakh or Rs 22 lakh) is wrong.

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