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

Sundaram Textiles Ltd. has a policy of restoring land after use and no legal obligation to do so exists. In the past it has always restored sites, and it has publicly announced this policy. At the balance sheet date, a quarry site has been used and restoration cost is estimated reliably at Rs 12 lakh. How should the company treat this under AS 29?

A provision of Rs 12 lakh should be recognised. Established past practice and a public announcement create a constructive obligation, the use of the site is the past event, an outflow is probable and the estimate is reliable, so AS 29 requires recognition rather than mere disclosure.

  1. ARecognise a provision of Rs 12 lakh because a constructive obligation existsCorrect
  2. BDisclose a contingent liability of Rs 12 lakh only
  3. CIgnore it, as there is no legal obligation
  4. DRecognise it when restoration work actually begins

Explanation

AS 29 defines an obligation as including a constructive obligation arising from established past practice and public announcement, which creates a valid expectation in others. The past event is the use of the site, an outflow is probable and the amount is reliable, so a provision of Rs 12 lakh is recognised. Treating it as a contingent liability ignores the constructive obligation.

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