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

Rajan Steels Ltd. decides on 10 March 2025 to close one division. The detailed formal plan was approved by the board and announced to the affected employees on 20 March 2025, before the year-end of 31 March 2025. Estimated costs are: employee termination Rs 9,00,000; retraining of continuing staff Rs 2,50,000; relocating continuing staff Rs 1,75,000; future operating losses of the division up to closure Rs 4,00,000; marketing to promote the company's changed image Rs 1,25,000. What restructuring provision should be made at 31 March 2025?

The restructuring provision is Rs 9,00,000. Because the plan was announced before the year-end, an obligation exists, but only direct costs not tied to continuing activities are provided, namely termination payments. Retraining, relocation, marketing and future operating losses are excluded.

  1. ARs 18,50,000
  2. BRs 9,00,000Correct
  3. CRs 14,50,000
  4. DRs 10,75,000

Explanation

A constructive obligation exists as the plan was announced, so a provision is allowed. It includes only direct expenditure necessarily entailed by the restructuring and not associated with ongoing activities: termination Rs 9,00,000. Retraining, relocation, marketing and future operating losses are excluded. Rs 10,75,000 wrongly adds relocation Rs 1,75,000.

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