Objective
IAS 37 ensures that appropriate recognition criteria and measurement bases are applied to provisions, contingent liabilities, and contingent assets, and that users can understand their nature, timing, and amount.
🧾 1. Key Definitions
| Term | Meaning |
|---|---|
| Provision | A liability of uncertain timing or amount — a present obligation resulting from a past event that will probably require an outflow of resources. |
| Liability | A present obligation arising from past events whose settlement is expected to result in an outflow of resources. |
| Contingent Liability | A possible obligation (not yet confirmed) or a present obligation that is not recognized because it is not probable or cannot be measured reliably. |
| Contingent Asset | A possible asset that arises from past events, whose existence will be confirmed only by uncertain future events not fully under the entity’s control. |
🧩 2. Recognition Criteria
A. Provision
Recognize a provision only if all three conditions are met:
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Present obligation (legal or constructive) exists as a result of a past event.
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Probable outflow of resources (more likely than not).
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Reliable estimate of the obligation can be made.
If any of the three is missing → do not recognize a provision.
B. Contingent Liability
Do not recognize, only disclose if:
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There’s a possible obligation, or
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There’s a present obligation but not probable or cannot be measured reliably.
If outflow is remote → no disclosure needed.
C. Contingent Asset
Do not recognize until realization is virtually certain.
If inflow is probable, disclose in notes.
If virtually certain, recognize as an asset.
💰 3. Measurement of Provisions
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Measure at best estimate of expenditure required to settle the obligation.
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Use expected value (weighted average of possible outcomes) if there’s a range of possible results.
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If time value of money is material → discount to present value.
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Reassess each reporting period.
📦 4. Types of Provisions (Common Examples)
| Type | Example | Description |
|---|---|---|
| Warranty | Product warranty on sold goods | Estimate cost of future repairs/replacements. |
| Restructuring | Closure of a factory, layoff plan | Recognize when a detailed plan and valid expectation exist. |
| Legal Claims | Pending lawsuits | Recognize if probable and reliably estimated. |
| Onerous Contracts | Costs exceed benefits | Recognize provision for unavoidable costs. |
| Decommissioning | Oil rigs, mines | Recognize provision for dismantling/restoration. |
⚙️ 5. Practical Examples
Example 1: Product Warranty
A company sells TVs with a 1-year warranty.
Expected repair cost = $30,000 (based on experience).
👉 Recognition:
If actual repair costs next year = $25,000 → remaining $5,000 reversed.
Example 2: Legal Case
A customer sues a company for $100,000.
Lawyers say a payout of $70,000 is probable.
👉 Recognize provision:
If the outcome is possible but not probable → disclose only as a contingent liability.
Example 3: Restructuring
Company announces a plan to close a division and notifies employees (constructive obligation).
Expected termination and closure costs = $200,000.
👉 Recognize provision when plan is announced and detailed:
Example 4: Onerous Contract
Company leases a warehouse for 3 years at $10,000/month but will not use it.
Subleasing is possible for only $6,000/month.
→ Unavoidable cost = $4,000/month × 36 months = $144,000.
Recognize a provision for onerous contract:
Example 5: Contingent Asset
Company filed a claim for insurance compensation of $500,000.
Insurer has not confirmed yet, but it is probable.
👉 Disclose in notes only.
If insurer confirms and payment is virtually certain, then recognize:
📘 6. Disclosure Requirements
Entities must disclose for each class of provision:
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Opening and closing balances
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Additional provisions made
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Amounts used
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Unused amounts reversed
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Nature and timing of expected outflows
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Major uncertainties and reimbursement details
📊 7. Summary Table
| Type | Recognize? | Disclose? | Example |
|---|---|---|---|
| Provision | ✅ Yes (if probable + reliable estimate) | Optional | Legal claim, warranty |
| Contingent liability | ❌ No | ✅ Yes (if possible) | Potential lawsuit |
| Contingent asset | ❌ No (until virtually certain) | ✅ Yes (if probable) | Insurance claim |
⚖️ 8. Key Differences from Other Standards
| IAS 37 | IAS 10 | IAS 12 |
|---|---|---|
| Deals with provisions and contingencies | Events after reporting period | Income tax provisions |
✅ 9. Quick Summary
| Step | Description |
|---|---|
| 1️⃣ | Identify obligation (legal or constructive) |
| 2️⃣ | Assess probability of outflow/inflow |
| 3️⃣ | Measure best estimate (discount if needed) |
| 4️⃣ | Recognize provision or disclose contingent item |
| 5️⃣ | Review and adjust each year |