International Accounting Standard 37
Provisions, Contingent Liabilities and
In April 2001 the International Accounting Standards Board (IASB) adopted IAS 37 Provisions, Contingent Liabilities and Contingent Assets, which had originally been issued by the International Accounting Standards Committee in September 1998. That standard replaced
parts of IAS 10 Contingencies and Events Occurring after the Balance Sheet Date that was issued in
1978 and that dealt with contingencies.
Other IFRSs have made minor consequential amendments to IAS 37. They include IFRS 9
Financial Instruments (issued October 2010), IFRS 9 Financial Instruments (Hedge Accounting and amendments to IFRS 9, IFRS 7 and IAS 39) (issued November 2013) and Annual Improvements to IFRSs 2010-2012 Cycle (issued December 2013).
INTERNATIONAL ACCOUNTING STANDARD 37
PROVISIONS, CONTINGENT LIABILITIES AND
Provisions and other liabilities
Relationship between provisions and contingent liabilities
Probable outflow of resources embodying economic benefits
Reliable estimate of the obligation
Risks and uncertainties
Present value Future events
Expected disposal of assets
CHANGES IN PROVISIONS
USE OF PROVISIONS
APPLICATION OF THE RECOGNITION AND MEASUREMENT RULES
Future operating losses
FOR THE ACCOMPANYING DOCUMENTS LISTED BELOW, SEE PART B OF THIS
A Tables - Provisions, contingent liabilities, contingent assets and
B Decision tree
C Examples: recognition D Examples: disclosures
International Accounting Standard 37 Provisions, Contingent Liabilities and Contingent Assets (IAS 37) is set out in paragraphs 1-99. All the paragraphs have equal authority but retain the IASC format of the Standard when it was adopted by the IASB. IAS 37 should be read in the context of its objective, the Preface to International Financial Reporting Standards and the Conceptual Framework for Financial Reporting. IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors provides a basis for selecting and applying accounting policies in the absence of explicit guidance.
IAS 37 prescribes the accounting and disclosure for all provisions, contingent
liabilities and contingent assets, except:
those resulting from financial instruments that are carried at fair value;
those resulting from executory contracts, except where the contract is onerous. Executory contracts are contracts under which neither party has performed any of its obligations or both parties have partially
performed their obligations to an equal extent;
those arising in insurance entities from contracts with policyholders; or
those covered by another Standard.
The Standard defines provisions as liabilities of uncertain timing or amount.
A provision should be recognised when, and only when:
an entity has a present obligation (legal or constructive) as a result of a
it is probable (ie more likely than not) that an outflow of resources embodying economic benefits will be required to settle the obligation;
a reliable estimate can be made of the amount of the obligation. The Standard notes that it is only in extremely rare cases that a reliable estimate will not be possible.
The Standard defines a constructive obligation as an obligation that derives from
an entity's actions where:
by an established pattern of past practice, published policies or a
sufficiently specific current statement, the entity has indicated to other
parties that it will accept certain responsibilities; and
as a result, the entity has created a valid expectation on the part of those
other parties that it will discharge those responsibilities.
In rare cases, for example in a lawsuit, it may not be clear whether an entity has a present obligation. In these cases, a past event is deemed to give rise to a present obligation if, taking account of all available evidence, it is more likely than not that a present obligation exists at the end of the reporting period. An entity recognises a provision for that present obligation if the other recognition criteria described above are met. If it is more likely than not that no present obligation exists, the entity discloses a contingent liability, unless the possibility of an outflow of resources embodying economic benefits is remote.
The amount recognised as a provision should be the best estimate of the expenditure required to settle the present obligation at the end of the reporting
period, in other words, the amount that an entity would rationally pay to settle the obligation at the end of the reporting period or to transfer it to a third party at that time.
The Standard requires that an entity should, in measuring a provision:
take risks and uncertainties into account. However, uncertainty does not
justify the creation of excessive provisions or a deliberate overstatement
discount the provisions, where the effect of the time value of money is
material, using a pre-tax discount rate (or rates) that reflect(s) current market assessments of the time value of money and those risks specific to the liability that have not been reflected in the best estimate of the expenditure. Where discounting is used, the increase in the provision
due to the passage of time is recognised as an interest expense;
take future events, such as changes in the law and technological
changes, into account where there is sufficient objective evidence that
they will occur; and
not take gains from the expected disposal of assets into account, even if
the expected disposal is closely linked to the event giving rise to the provision.
An entity may expect reimbursement of some or all of the expenditure required
to settle a provision (for example, through insurance contracts, indemnity
clauses or suppliers' warranties). An entity should:
recognise a reimbursement when, and only when, it is virtually certain that reimbursement will be received if the entity settles the obligation. The amount recognised for the reimbursement should not exceed the
amount of the provision; and
recognise the reimbursement as a separate asset. In the statement of comprehensive income, the expense relating to a provision may be presented net of the amount recognised for a reimbursement.
Provisions should be reviewed at the end of each reporting period and adjusted to reflect the current best estimate. If it is no longer probable that an outflow of resources embodying economic benefits will be required to settle the obligation, the provision should be reversed.
A provision should be used only for expenditures for which the provision was originally recognised.
Provisions - specific applications
The Standard explains how the general recognition and measurement
requirements for provisions should be applied in three specific cases: future operating losses; onerous contracts; and restructurings.
Provisions should not be recognised for future operating losses. An expectation of future operating losses is an indication that certain assets of the operation may be impaired. In this case, an entity tests these assets for impairment under IAS 36 Impairment of Assets.
If an entity has a contract that is onerous, the present obligation under the contract should be recognised and measured as a provision. An onerous contract is one in which the unavoidable costs of meeting the obligations under the contract exceed the economic benefits expected to be received under it.
The Standard defines a restructuring as a programme that is planned and
controlled by management, and materially changes either:
the scope of a business undertaken by an entity; or
the manner in which that business is conducted.
A provision for restructuring costs is recognised only when the general
recognition criteria for provisions are met. In this context, a constructive
obligation to restructure arises only when an entity:
has a detailed formal plan for the restructuring identifying at least:
the business or part of a business concerned;
the principal locations affected;
the location, function, and approximate number of employees
who will be compensated for terminating their services;
the expenditures that will be undertaken; and
when the plan will be implemented; and
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.
A management or board decision to restructure does not give rise to a
constructive obligation at the end of the reporting period unless the entity has,
before the end of the reporting period:
started to implement the restructuring plan; or
communicated the restructuring plan to those affected by it in a
sufficiently specific manner to raise a valid expectation in them that the entity will carry out the restructuring.
Where a restructuring involves the sale of an operation, no obligation arises for the sale until the entity is committed to the sale, ie there is a binding sale agreement.
A restructuring provision should include only the direct expenditures arising
from the restructuring, which are those that are both:
necessarily entailed by the restructuring; and
not associated with the ongoing activities of the entity. Thus, a
restructuring provision does not include such costs as: retraining or relocating continuing staff; marketing; or investment in new systems and distribution networks.
The Standard defines a contingent liability as:
a possible obligation that arises from past events and whose existence
will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity;
a present obligation that arises from past events but is not recognised
it is not probable that an outflow of resources embodying
economic benefits will be required to settle the obligation; or
the amount of the obligation cannot be measured with sufficient
An entity should not recognise a contingent liability. An entity should disclose a
contingent liability, unless the possibility of an outflow of resources embodying economic benefits is remote.
The Standard defines a contingent asset as a possible asset that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity. An example is a claim that an entity is pursuing through legal processes, where the outcome is uncertain.
An entity should not recognise a contingent asset. A contingent asset should be disclosed where an inflow of economic benefits is probable.
When the realisation of income is virtually certain, then the related asset is not a contingent asset and its recognition is appropriate.
The Standard becomes operative for annual financial statements covering
periods beginning on or after 1 July 1999. Earlier application is encouraged.
International Accounting Standard 37
Provisions, Contingent Liabilities and Contingent Assets
The objective of this Standard is to ensure that appropriate recognition criteria and measurement bases are applied to provisions, contingent liabilities and contingent assets and that sufficient information is disclosed in the notes to enable users to understand their nature, timing and amount.
This Standard shall be applied by all entities in accounting for provisions,
contingent liabilities and contingent assets, except:
those resulting from executory contracts, except where the
contract is onerous; and
those covered by another Standard.
This Standard does not apply to financial instruments (including guarantees)
that are within the scope of IFRS 9 Financial Instruments.
Executory contracts are contracts under which neither party has performed any
of its obligations or both parties have partially performed their obligations to an equal extent. This Standard does not apply to executory contracts unless they are onerous.
When another Standard deals with a specific type of provision, contingent
liability or contingent asset, an entity applies that Standard instead of this
Standard. For example, some types of provisions are addressed in Standards on:
construction contracts (see IAS 11 Construction Contracts);
income taxes (see IAS 12 Income Taxes);
leases (see IAS 17 Leases). However, as IAS 17 contains no specific
requirements to deal with operating leases that have become onerous,
this Standard applies to such cases;
employee benefits (see IAS 19 Employee Benefits);
insurance contracts (see IFRS 4 Insurance Contracts). However, this
Standard applies to provisions, contingent liabilities and contingent assets of an insurer, other than those arising from its contractual obligations and rights under insurance contracts within the scope of
IFRS 4; and
contingent consideration of an acquirer in a business combination (see
IFRS 3 Business Combinations).
Some amounts treated as provisions may relate to the recognition of revenue, for example where an entity gives guarantees in exchange for a fee. This Standard does not address the recognition of revenue. IAS 18 Revenue identifies
the circumstances in which revenue is recognised and provides practical guidance on the application of the recognition criteria. This Standard does not change the requirements of IAS 18.
This Standard defines provisions as liabilities of uncertain timing or amount. In some countries the term 'provision' is also used in the context of items such as depreciation, impairment of assets and doubtful debts: these are adjustments to the carrying amounts of assets and are not addressed in this Standard.
Other Standards specify whether expenditures are treated as assets or as expenses. These issues are not addressed in this Standard. Accordingly, this Standard neither prohibits nor requires capitalisation of the costs recognised when a provision is made.
This Standard applies to provisions for restructurings (including discontinued operations). When a restructuring meets the definition of a discontinued operation, additional disclosures may be required by IFRS 5 Non-current Assets Held for Sale and Discontinued Operations.
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