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CMA Intermediate · Corporate Accounting and Auditing · Provisions, Contingent Liabilities and Contingent Assets (Ind AS 37)

Sundaram Ltd's board decided on 20 March to close a division. No detailed formal plan existed at the year-end 31 March, and nothing had been announced to employees or others. Which treatment of the restructuring cost of Rs 40 lakh is correct for the year ended 31 March?

No provision is recognised. A board decision alone does not create a constructive obligation for restructuring. Without a detailed formal plan and a valid expectation raised in those affected through announcement or start of implementation, there is no present obligation at the reporting date.

  1. ARecognise no provision, because no constructive obligation exists without a detailed plan and valid expectation in those affectedCorrect
  2. BRecognise a provision of Rs 40 lakh because the board decided
  3. CRecognise half as a provision and half as contingent liability
  4. DRecognise it as a contingent asset

Explanation

A board decision alone does not create a constructive obligation; there must be a detailed formal plan and a valid expectation raised in those affected, such as by starting implementation or announcing it. Neither occurred by year-end, so no present obligation exists and no provision arises.

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