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

Rohan Engineering Ltd. decided on 10 March 2025 to close one of its plants. A detailed formal plan was approved by the board, but no announcement was made to employees or others and no steps had been taken to implement it by 31 March 2025. Estimated restructuring cost is Rs 90 lakh. In the financial statements for the year ended 31 March 2025, what is the correct treatment under AS 29 (Revised)?

No provision is made. A restructuring provision needs a constructive obligation, which arises only when a detailed formal plan exists and affected parties have been led to expect it by implementation or announcement. Here the board decision was not communicated or started, so no obligation existed at the balance sheet date.

  1. ARecognise a provision of Rs 90 lakh because the board approved the plan
  2. BDisclose Rs 90 lakh as a contingent liability
  3. CRecognise a provision of Rs 45 lakh, being half the cost, for the portion of the year elapsed
  4. DMake no provision because there is no constructive obligation, as the plan was neither started nor announcedCorrect

Explanation

A restructuring provision requires a constructive obligation: a detailed formal plan and a valid expectation in those affected, created by starting implementation or announcing the main features. Neither happened by the balance sheet date, so no obligation exists. A board decision alone is not enough, so Rs 90 lakh cannot be provided.

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