U Ltd. is a large conglomerate with a number of subsidiaries. It is preparing consolidated financial statements as on 31st March 20X2 as per the…

CA Final · Financial Reporting · MTP · May 2026
U Ltd. is a large conglomerate with a number of subsidiaries. It is preparing consolidated financial statements as on 31st March 20X2 as per the notified Ind AS. The financial statements are due to be approved for issue on 15th May 20X2. Following are a few transactions that have taken place in some of its subsidiaries during the year: G Ltd. is a wholly owned subsidiary of U Ltd. engaged in management consultancy services. On 31st January 20X2, the board of directors of U Ltd. decided to discontinue the business of G Ltd. from 30th April 20X2. They made a public announcement of their decision on 15th February 20X2. G Ltd. does not have many assets or liabilities and it is estimated that the outstanding trade receivables and payables would be settled by 31st May 20X2. U Ltd. would collect any amounts still owed by G Ltd.'s customers after 31st May 20X2. They have offered the employees of G Ltd. termination payments or alternative employment opportunities. Following are some of the details relating to G Ltd.: On the date of public announcement, it is estimated by G Ltd. that it would have to pay 540 lakhs as termination payments to employees and the costs for relocation of employees who would remain with the Group would be 60 lakhs. The actual termination payments totalling to 520 lakhs were made in full on 15th May 20X2. As per latest estimates made on 15th May 20X2, the total relocation cost is 63 lakhs.G Ltd. had taken a property on lease, which was expiring on 31st March 20X6. The present value of the future lease rentals (using an appropriate discount rate) is 430 lakhs. On 15th May 20X2, G Ltd. made a payment to the lessor of 410 lakhs in return for early termination of the lease. The loss after tax of G Ltd. for the year ended 31st March 20X2 was 400 lakhs. G Ltd. made further operating losses totalling 60 lakhs till 30th April 20X2. Determine the provisions that the Company is required to make as per Ind AS 37?

Suggested Answer and Working Notes:

The operations of G Ltd were discontinued on 30 th April 20X2 and therefore, would be treated as discontinued operation for the year ending 31 st March 20X3. It does not meet the criteria for held for sale since the company is terminating its business and does not hold these for sale. The Board of directors of U Ltd have decided to terminate the operations of G Ltd. from 30 th April 20X2. They have made a formal announcement on 15 th February 20X2, thus creating a valid expectation that the termination will be implemented. This creates a constructive obligation on the company and requires provisions for restructuring. A restructuring provision includes only the direct expenditures arising from the restructuring that are necessarily entailed by the restructuring and are not associated with the ongoing activities of the entity. The termination payments fulfil the above condition. As per Ind AS 10 ‘Events after Reporting Date', events that provide additional evidence of conditions existing at the reporting date should be reflected in the financial statements. Therefore, the company should make a provision for 520lakhs in this respect. The relocation costs relate to the future conduct of the business and are not liabilities for restructuring at the end of the reporting period. Hence, these would be recognised on the same basis as if they arose independently of a restructuring. The lease would be regarded as an onerous contract. A provision would be made at the lower of the cost of fulfilling it and any compensation or penalties arising from failure to fulfil it. Hence, a provision shall be made for 410lakhs. Further operating losses relate to future events and do not form a part of the closure provision. Therefore, the total provision required = 520 lakhs +410 lakhs = 930 lakhs.

Topics: Ind AS 37, Ind AS 23

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