On 20 December a company's board decided to close a factory in the following March. At the year end of 31 December, no detailed plan had been drawn up and the decision had not been communicated to employees, customers or suppliers. How should the closure costs be treated in the financial statements for the year ended 31 December?

Correct answer: C) No provision should be recognised, because there is no present obligation at the year end

Explanation

A restructuring provision requires a constructive obligation, which arises only when there is a detailed formal plan and those affected have a valid expectation that it will be carried out (for example, because it has been announced). A board decision alone, not communicated, does not create an obligation. Future operating losses are never provided for.