Rustom Ltd. has an obligation to dismantle an oil rig at end of 10-year useful life (₹100 cr estimated). Directors propose to EXPENSE the dismantling cost when incurred, with NO entries/disclosures now. They cite "judgment" and that "prudence is just one way of achieving faithful representation." Under Ind AS 16 + 37 + Code of Ethics:
ADirectors are acting UNETHICALLY — contravention of Ind AS 16 (capitalise PV of dismantling cost) + Ind AS 37 (recognise provision). CA must escalate to non-executive directors / governance. Failing to do so = breach of Professional Behaviour + Misconduct Clauses 5, 6, 7 of Part I Second Schedule
BThe CA can defer the decision until the next reporting period without consequence
CDirectors are correct — judgment permits any approach where Ind AS is ambiguous
DNot unethical — prudence is optional under the Conceptual Framework
Answer & Solution
Correct answer: A. Directors are acting UNETHICALLY — contravention of Ind AS 16 (capitalise PV of dismantling cost) + Ind AS 37 (recognise provision). CA must escalate to non-executive directors / governance. Failing to do so = breach of Professional Behaviour + Misconduct Clauses 5, 6, 7 of Part I Second Schedule
Ind AS 16.16(c) + Ind AS 37 mandate capitalising PV of dismantling cost as part of PPE with corresponding provision. Directors' "judgment" claim is incorrect — the accounting is prescribed, not judgmental. CA's response: raise with management, escalate to non-executive directors. Failing to communicate the corrective action breaches Professional Behaviour and triggers Misconduct under Clauses 5 (failure to disclose material fact), 6 (failure to report material misstatement), 7 (failure to exercise due diligence).
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