On 1st January, 20X2, the directors of Johansen Ltd. decided to terminate production at one of the company's divisions. This decision was publicly…

CA Final · Financial Reporting · MTP · September 2025
On 1st January, 20X2, the directors of Johansen Ltd. decided to terminate production at one of the company's divisions. This decision was publicly announced on 31st January, 20X2. The activities of the division were gradually reduced from 1st April, 20X2 and closure is expected to be complete by 30th September, 20X2. At 31st January, 20X2, the directors prepared the following estimates of the financial implications of the closure: (i) Redundancy costs were initially estimated at 2 million. Further expenditure of 8,00,000 will be necessary to retrain employees who will be affected by the closure but remained with Johansen Ltd. in different divisions. This retraining will begin in early July 20X2. Latest estimates are that redundancy costs will be - 1.9 million, with retraining costs of 8,50,000. (ii) Plant and equipment having an expected carrying value at 31st March, 20X2 of 8 million will have a recoverable amount - 1.5 million. These estimates remain valid. (iii) The division is under contract to supply goods to a customer for the next three years at a pre-determined price. It will be necessary to pay compensation of 6,00,000 to this customer. The compensation actually paid, on 31st May, 20X2, was - 5,50,000. (iv) The division will make operating losses of 3,00,000 per month in the first three months of 20X2-20X3 and - 2,00,000 per month in the next three months of 20X2-20X3. This estimate proved accurate for April, 20X2 and May, 20X2. (v) The division operates from a leasehold premises. The lease is a non-cancellable operating lease with an unexpired term of five years from 31st March, 20X2. The annual lease rentals (payable on 31st March in arrears) are - 1.5 million. The landlord is not prepared to discuss an early termination payment. Following the closure of the division it is estimated that Johansen Ltd. would be able to sub-let the property from 1st October, 20X2. Johansen Ltd. could expect to receive a rental of 3,00,000 for the six-month period from 1st October, 20X2 to 31st March, 20X3 and then annual rentals of 5,00,000 for each period ending 31st March, 20X4 to 31st March, 20X7. All rentals will be received in arrears. Any discounting calculations should be performed using a discount rate of 5% per annum. You are given the following data for discounting at 5% per annum: Present value of 1received at the end of year 1 = 0.95Present value of 1received at the end of year 1-2 inclusive = 1.86Present value of 1received at the end of year 1-3 inclusive = 2.72Present value of 1received at the end of year 1-4 inclusive = 3.54Present value of 1received at the end of year 1–5 inclusive = 4.32 Compute the amounts that will be included in the Statement of Profit and Loss for the year ended 31st March, 20X2 in respect of the decision to close the division of Johansen Ltd.

Suggested Answer and Working Notes:

As per Ind AS 37 ‘Provisions, Contingent Liabilities and Contingent Assets', closure of a division is a restructuring exercise. Ind AS 37 states that a constructive obligation to proceed with the restructuring arises when at the reporting date the entity has: Commenced activities connected with the restructuring; orMade a public announcement of the main features of the restructuring to those affected by it. In this case a public announcement has been made and so a provision will be necessary at 31st March, 20X2. This will result in the following charges to the Statement of Profit and Loss: (i) Estimate of redundancy costs of 1.9 million is the best estimate of the expenditure at the date the financial statements are authorized for issue. Changes in estimates after the reporting date are taken into account for this purpose as an adjusting event after the reporting date. No charge is necessary for the retraining costs as these are not incurred in 20X1-20X2 and cannot form part of a restructuring provision as they are related to the ongoing activities of the entity. (ii) Impairment of plant and equipment of 6.5 million is although not strictly part of the restructuring provision the decision to restructure before the year-end means that related assets need to be reviewed for impairment. In this case the recoverable amount of the plant and equipment is only - 1.5 million. As per Ind AS 36 ‘Impairment of Assets', property, plant and equipment should be written down to this amount, resulting in a charge of 6.5 million to the income statement. (iii) For compensation for breach of contract of 0.55 million, same principle applies here as applied to the redundancy costs. (iv) No charge is recognized in 20X1-20X2 with respect to future operating losses of 20X2-20X3. Future operating losses relate to future events and provisions are made only for the consequences of past events. (iv) Ind AS 37 states that an onerous contract is one for which the expected cost of fulfilling the contract exceeds the benefits expected from the contract. Provision is made for the lower of the expected net cost of fulfilling the contract and the cost of early termination (not available in this case). The net cost of fulfilling the contract is 4.51 million [₹ 1.5 million x 4.32 - 0.3 million x 0.95 - 0.5 million x (4.32 – 0.95)].

Topics: Ind AS 37, Ind AS 23

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