IAS 37 - Provisions, contingent liabilities and contingent assets

Publication date: 08 Jun 2020

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A liability is a 'present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits'. A provision is "a liability of uncertain timing or amount".

Recognition and initial measurement

A provision is recognised when: the entity has a present obligation as a result of past events; it is probable (more likely than not) that a transfer of economic benefits will be required to settle the obligation; and a reliable estimate of the amount of the obligation can be made.

The amount recognised as a provision is the best estimate of the expenditure required to settle the present obligation at the balance sheet date, measured at the present value of the expected cash outflows where the effect of the time value of money is material. Provisions are not recognised for future operating losses.

A present obligation arises from an obligating event and may take the form of either a legal obligation or a constructive obligation. An obligating event leaves the entity no realistic alternative to settling the obligation. If the entity can avoid the future expenditure by its future actions, it has no present obligation, and no provision is required. For example, an entity cannot recognise a provision based solely on the intent to incur expenditure at some future date or the expectation of future operating losses.

An obligation does not have to be a 'legal' obligation before a provision is recognised. An entity may have an established pattern of past practice, published policies or a sufficient specific current statement that indicates to other parties that it will accept certain responsibilities and as a result has created a valid expectation on the part of those other parties that it will discharge those responsibilities (that is, the entity has a constructive obligation).

If an entity has an onerous contract (the unavoidable costs of meeting the obligations under the contract exceed the economic benefits expected to be received under it), the present obligation under the contract is recognised as a provision. Impairments of any assets dedicated to the contract are recognised before making a provision.

Restructuring provisions

A restructuring provision is recognised only when the general recognition criteria for provision are met. The obligation for a restructuring is often constructive. A constructive restructuring obligation arises only when there is: (a) a detailed formal plan identifying the main features of the restructuring; and (b) a valid expectation in those affected that the entity will carry out the restructuring by starting to implement the plan or announcing its main features to those affected.

A restructuring plan does not create a present obligation at the balance sheet date if it is announced after that date, even if it is announced before the financial statements are approved. A sale or termination of a business might fall under the definition of a restructuring. No obligation arises in respect of restructuring costs associated with the sale of an operation until the entity is committed to the sale (that is, there is a binding sale agreement).

Restructuring provision includes only the direct expenditures arising from the restructuring, which are necessarily entailed by the restructuring and not those associated with the entity's ongoing activities. Any expected gains on the sale of assets are not considered in measuring a restructuring provision.


Where some or all of the expenditure required to settle a provision is expected to be reimbursed by another party, the reimbursement should be recognised only when it is virtually certain that reimbursement will be received if the entity settles the obligation. The entity typically remains liable for the entire obligation, and reimbursements are therefore presented separately as assets. The amount recognised should not exceed the amount of the related provision. Expenses relating to a provision can be presented net of the amount recognised for a reimbursement in the income statement.

Subsequent measurement

Provisions should be re-assessed at the end of each reporting period and adjusted to reflect current best estimates. This re-assessment should include the estimated cash flows and the discount rate. The unwinding of the discount due to the passage of time should be included as an element of borrowing costs in arriving at profit or loss for the year.

Contingent liabilities

Contingent liabilities are possible obligations that arise from past events and whose existence will be confirmed only on the occurrence or non-occurrence of uncertain future events outside the entity's control, or present obligations that arise from past events but are not recognised because: (a) it is not probable that an outflow of economic benefits will be required to settle the obligation; or (b) the amount cannot be measured reliably.

Contingent liabilities are not recognised, but are disclosed, unless the possibility of an outflow is remote.

Contingent assets

Contingent assets are possible assets that arise from past events and whose existence will be confirmed only on the occurrence or non-occurrence of uncertain future events outside the entity's control. Contingent assets are not recognised.

Contingent assets are disclosed if the inflow of economic benefits is probable.


A public authority could impose a levy on entities based on measures such as gross revenues for a specified period or on assets or liabilities at a specified date. IFRIC 21 addresses the accounting for such levies.  The obligating event that gives rise to a liability to pay a levy is the activity that triggers the payment of the levy, as identified by the legislation.

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