On 1st April 20X3, Jackson Ltd. purchased some land for 10 million. Jackson Ltd. purchased the land in order to build a Plant for manufacturing…

CA Final · Financial Reporting · MTP · January 2026
On 1st April 20X3, Jackson Ltd. purchased some land for 10 million. Jackson Ltd. purchased the land in order to build a Plant for manufacturing generator parts. During the six months from 1st April 20X3 to 30th September 20X3, Jackson Ltd. incurred costs totaling - 3.5 million in preparing the land and erecting the structure of the Plant. This process caused some damage to the land for making it suitable for setting up the Plant. Jackson Ltd. began operations on 1st October 20X3 and the directors estimate that the Plant site would have useful economic life of 10 years from that date. Jackson Ltd. is legally obliged to rectify the damage caused to the land for setting up the Plant. The directors estimate that the costs of this rectification after 10 years on 30th September, will be as follows: (i) 3 million to rectify the damage caused by the preparation of the land for setting up the Plant. (ii) ₹ 0.2 million for each year to rectify the damage caused owing to effluent generated out of the production process of the Plant. Following this rectification work the land could potentially be sold to a third party for no less than its original cost of 10 million. An annual discount rate appropriate for this project is 12%. The present value of 1payable in 10 years' time with an annual discount rate of 12% is 32.2 paise. The present value of 1payable in 91/2 years' time with an annual discount rate of 12% is 34.1 paise. What is the implication of rectification of damage of land mentioned in the case study? What is the relevant provision related to this concept under IFRS?

Suggested Answer and Working Notes:

The treatment related to the transactions of Jackson Ltd, under relevant IFRS is explained as under: In accordance with the principles of IAS 16 ‘Property, Plant and Equipment', costs of 13.5 million (10million +3.5 million) will be debited to property, plant and equipment as cost of Plant. From 1 October 20X3, an obligation exists to rectify the damage caused by the Plant and this obligation should be provided for. The amount provided is the present value of the expected future payment, which is 0.966 million (3million x 0.322). The amount provided is debited to property, plant and equipment and credited to provisions at 1 October 20X3. The costs of Plant (excluding the land) will be - 4.466 million (₹ 3.5 million +0.966 million). This cost will be depreciated over a 10-year period, giving a charge in the current period of 0.223 million in the current year (₹ 4.466 million x 1/10 x 6/12). The closing balance in property, plant and equipment is 14.243 million (₹ 13.5 million +0.966 million - 0.223 million). As the date of settlement of the liability draws closer the discount unwinds. The unwinding of the discount in the current year is 0.058 million (₹ 0.966 million x 12% x 6/12). The land rectification process itself creates an additional liability based on the damage caused by the reporting date. The additional amount provided is 0.034 million (₹ 0.20 million x 6/12 x 0.341). This additional provision causes an extra charge to the statement of comprehensive income. The carrying amount of the provision at the year-end is 1.058 million (₹ 0.966 million +0.058 million +0.034 million).

Topics: Ind AS 37, Ind AS 23

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