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

Tungabhadra Mining Ltd. has an obligation to restore a site after mining. At the balance sheet date, the company has a legal obligation arising from extraction already done, and the restoration cost for that part is estimated at Rs 8 crore. Further extraction planned next year will add another Rs 5 crore of restoration cost. Which statement correctly applies AS 29 (Revised)?

Provide Rs 8 crore only. The obligating past event is the extraction already carried out, which creates a present legal obligation. Restoration costs relating to extraction planned for next year arise from future activity and cannot be provided for at the balance sheet date.

  1. AProvide Rs 13 crore as the whole mine will have to be restored
  2. BProvide Rs 8 crore only, since the obligating event is the extraction done so farCorrect
  3. CProvide Rs 5 crore only, being the future obligation
  4. DDisclose Rs 13 crore as a contingent liability and provide nothing

Explanation

A provision requires a present obligation from a past event. Only the extraction already done creates the obligation, so Rs 8 crore is provided. Costs related to future extraction arise from future events and cannot be provided now, so Rs 13 crore is wrong.

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