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

Mehta Chemicals Ltd. has a policy of cleaning up contamination caused by its operations, though no law requires it. It has publicly announced this policy and has a record of honouring it. At 31 March 2026 its plant has caused contamination estimated to need Rs 12 lakh to clean up. Under AS 29, what is the correct treatment?

A provision of Rs 12 lakh should be recognised. The company's published policy and past record of cleaning up create a constructive obligation, which AS 29 treats like a legal one. Since an outflow is probable and reliably estimable, absence of a legal requirement does not prevent recognition.

  1. ARecognise a provision of Rs 12 lakh because a constructive obligation existsCorrect
  2. BDisclose a contingent liability of Rs 12 lakh only
  3. CMake no provision or disclosure because there is no legal obligation
  4. DRecognise the provision only when the clean-up work actually begins

Explanation

An obligation can arise from an established pattern of past practice or published policy that creates a valid expectation in others that the entity will discharge it; this is a constructive obligation. The event has occurred, an outflow is probable and the amount is reliably estimated, so a provision is recognised. Requiring a legal obligation is wrong because AS 29 covers constructive obligations too.

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