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

Ravi Steels Ltd. decided on 10 March 2025 to close a division and, before 31 March 2025, announced a detailed formal plan to the affected employees. Estimated costs are: employee termination Rs 40 lakh, retraining of continuing staff Rs 8 lakh, relocation of continuing staff Rs 6 lakh, and future operating losses of the division till closure Rs 15 lakh. What provision for restructuring should be made at 31 March 2025?

The restructuring provision is Rs 40 lakh. The plan was announced, creating a constructive obligation, but only termination costs are directly entailed by the restructuring. Retraining, relocation of continuing staff and future operating losses relate to ongoing activities and cannot be provided for under AS 29.

  1. ARs 40 lakhCorrect
  2. BRs 48 lakh
  3. CRs 54 lakh
  4. DRs 69 lakh

Explanation

Only direct expenditure necessarily entailed by the restructuring and not associated with ongoing activities is provided. Termination costs of Rs 40 lakh qualify. Retraining and relocation of continuing staff and future operating losses relate to ongoing activities and are excluded. Rs 48 lakh and Rs 54 lakh wrongly add retraining and relocation, and Rs 69 lakh adds all items.

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