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

Neelkanth Steel Ltd. decided in February 2026 to close one of its plants. The Board approved a detailed formal plan on 20 March 2026, and on 28 March 2026 the company announced the main features of the plan to the affected employees. Estimated costs: employee termination Rs 30 lakh, retraining of continuing staff Rs 8 lakh, and relocation of machinery to other plants Rs 12 lakh. Future operating losses of the plant until closure are expected at Rs 15 lakh. What restructuring provision is to be made as at 31 March 2026?

The provision is Rs 30 lakh. The detailed plan was announced to those affected before year end, creating a constructive obligation. Only direct costs not tied to ongoing activities are included, so termination costs qualify while retraining, relocation and future operating losses are excluded.

  1. ARs 30 lakhCorrect
  2. BRs 38 lakh
  3. CRs 50 lakh
  4. DRs 65 lakh

Explanation

A constructive obligation exists because of the detailed plan and the announcement to those affected before the balance sheet date. A restructuring provision includes only direct expenditure necessarily entailed by the restructuring and not associated with ongoing activities. Termination costs of Rs 30 lakh qualify. Retraining, relocation and future operating losses relate to continuing activities or future operations and are excluded.

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