Page 3 - 13. COMPILER QB - INDAS 37

What are the provisions that the Company is required to make as per Ind AS 37?
Solution

A discontinued operation is one that is discontinued in the period or classified as held for sale at the year-

end. The operations of G Ltd were discontinued on 30th April 2018 and therefore, would be treated as
discontinued operation for the year ending 31st March 2019. It does not meet the criteria for holding for sale
since the company is terminating its business and does not hold these for sale.
Accordingly, the results of G Ltd will be included on a line-by-line basis in the consolidated statement of
comprehensive income as part of the profit from continuing operations of U Ltd for the year ending 31st

March 2018.
As per Ind AS 37 ―Provisions, Contingent Liabilities and Contingent Assets‖, restructuring includes sale or
termination of a line of business. A constructive obligation to restructure arises when:
(a) an entity has a detailed formal plan for the restructuring
(b) Has raised a valid expectation in those affected that it will carry out the restructuring by starting to
implement that plan or announcing its main features to those affected by it.

The Board of directors of U Ltd have decided to terminate the operations of G Ltd. from 30th April 2018.
They have made a formal announcement on 15th February 2018, 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 Rs520 lakhs 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 operating 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 Rs410 lakhs.

Further operating losses relate to future events and do not form a part of the closure provision.
Therefore, the total provision required = Rs520 lakhs + Rs410 lakhs = Rs930 lakhs
Note: Various issues related to the applicability of Ind AS / implementations under Companies (Indian
Accounting Standards) Rules, 2015, are being raised by preparers, users and other stakeholders. Although many
clarifications have been issued by way of ITFG Bulletins or EAC Opinion, still issues are arising on account of

varying interpretations on several of its guidance. Therefore, alternate answers may be possible for the above
questions based on standards, depending upon the view taken.

Q2 (Nov. 19)
(a) A manufacturer gives warranties at the time of sale to purchasers of its product. Under the terms of the

contract for sale, the manufacturer undertakes to remedy, by repair or replacement, manufacturing defects
that become apparent within three years from the date of sale. As this is the first year that the warranty
has been available, there is no data from the firm to indicate whether there will be a claim under the
13. 2