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

Mehta Engineering Ltd. decided on 20 March 2026 to close one of its divisions and prepared a detailed formal plan. Before 31 March 2026 the plan was neither announced to the affected employees nor started. The estimated closure costs are Rs 25 lakh. A board meeting on 10 April 2026 approved the financial statements, and the plan was announced to employees on 5 April 2026. What is the correct treatment in the financial statements for the year ended 31 March 2026?

No provision should be recognised for the year ended 31 March 2026. A restructuring obligation arises only when a detailed formal plan exists and the plan has been announced or implementation started by the balance sheet date. Here the announcement came on 5 April, so the cost belongs to the next year.

  1. ARecognise a provision of Rs 25 lakh because the board decided before the year end
  2. BRecognise no provision, because no constructive obligation existed at the balance sheet dateCorrect
  3. CRecognise a contingent asset of Rs 25 lakh
  4. DRecognise a provision of Rs 25 lakh because the announcement was made before approval of accounts

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, on or before the balance sheet date. Here neither happened by 31 March 2026, so no obligation existed. The 5 April announcement is a post-balance sheet event creating the obligation in the next year; the board decision alone is insufficient.

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