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

Sundaram Textiles Ltd. closed its financial year on 31 March. On 20 March the Board approved a detailed formal plan to close its Surat unit, and on 25 March it announced the main features of the plan to the affected employees and the union. Estimated costs: employee termination payments Rs 40 lakh, retraining of continuing staff Rs 12 lakh, relocation of continuing staff Rs 8 lakh. What amount should be recognised as restructuring provision at 31 March?

The restructuring provision is Rs 40 lakh. Since the plan was announced, a constructive obligation exists, but only termination payments are directly caused by restructuring. Retraining and relocation of continuing staff relate to ongoing activities of the enterprise and are excluded from the provision.

  1. ARs 40 lakhCorrect
  2. BRs 52 lakh
  3. CRs 48 lakh
  4. DRs 60 lakh

Explanation

A restructuring provision is recognised when there is a detailed formal plan and a valid expectation has been raised by starting implementation or announcing it. Only direct expenditure necessarily entailed by the restructuring and not associated with ongoing activities is included. Termination payments of Rs 40 lakh qualify. Retraining and relocation of continuing staff relate to ongoing activities, so including them (Rs 52, 48 or 60 lakh) is wrong.

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