Last reviewed: July 2026.
A provision is a liability of uncertain timing or amount. IAS 37 requires recognition when an entity has a present legal or constructive obligation from a past event, an outflow of economic resources is probable, and the amount can be estimated reliably.
Uncertainty does not prevent recognition when the criteria are met. The entity estimates the expenditure required to settle or transfer the obligation and updates the provision at each reporting date.
Provision recognition criteria
- A present obligation exists because of a past event.
- An outflow of resources embodying economic benefits is probable.
- A reliable estimate can be made.
When these conditions are not all satisfied, the item may be disclosed as a contingent liability or may require no recognition or disclosure, depending on the facts.
Provision versus contingent liability
| Question | Provision | Contingent liability | Neither |
|---|---|---|---|
| Present obligation from a past event? | Yes | Possible or unrecognised present obligation | No obligation |
| Probable outflow? | Yes | Not probable | No |
| Reliable estimate? | Yes | Cannot be measured reliably in rare cases | Not applicable |
| Statement of financial position? | Recognised | Not recognised | Not recognised |
| Disclosure? | Nature, timing, uncertainty and movements as required | Unless outflow is remote | Normally no IAS 37 disclosure |
Legal and constructive obligations
A legal obligation arises from contract, legislation or other operation of law. A constructive obligation arises from an established pattern, published policy or sufficiently specific statement that creates a valid expectation in other parties that the entity will accept responsibilities.
Management intention alone does not create a provision. The entity must have little realistic alternative to settlement because of a present obligation.
Measurement of a provision
Measure the best estimate of expenditure required to settle the present obligation at the reporting date or transfer it to a third party. Consider risks, uncertainties and a range of possible outcomes without deliberate overstatement.
For a large population, an expected-value approach may be appropriate. For a single obligation, the most likely outcome may be informative, but other possible outcomes must be considered.
Discounting and future events
When the time value of money is material, discount the expected expenditure to present value using the applicable IAS 37 requirements. The unwinding of the discount is recognised over time.
Future events can be reflected when sufficient objective evidence exists that they will occur. Expected asset disposals are not used to offset a provision. Reimbursements are recognised separately only when receipt is virtually certain under the Standard.
Warranty provision example
A manufacturer sells 10,000 products. Based on reliable evidence, 80% will need no repair, 15% will need a minor repair costing 20 CU and 5% will need a major repair costing 100 CU.
Expected cost per product is:
- 80% × 0 = 0 CU
- 15% × 20 = 3 CU
- 5% × 100 = 5 CU
Total expected warranty cost is 10,000 × 8 CU = 80,000 CU. If the recognition criteria are met, debit warranty expense and credit warranty provision.
Onerous contracts
An onerous contract is one in which unavoidable costs of meeting obligations exceed expected economic benefits. Recognise a provision after considering impairment of assets dedicated to the contract as required. The cost of fulfilling includes incremental costs and an allocation of other costs that relate directly to fulfilling the contract.
Restructuring provisions
A board decision or internal plan alone is not enough. A restructuring provision is recognised only when a detailed formal plan exists and the entity has created a valid expectation in affected parties by starting implementation or announcing the main features.
Future operating losses and costs associated with ongoing activities are not included merely because management plans to restructure.
Future operating losses
IAS 37 does not permit a provision for future operating losses because no present obligation exists at the reporting date. Forecast losses may indicate impairment of assets, which should be tested under the applicable Standard.
Provision review and use
Review provisions at every reporting date and adjust to the current best estimate. Reverse a provision when an outflow is no longer probable. Use a provision only for the expenditure for which it was originally recognised.
Maintain a movement schedule showing opening balance, additions, usage, reversals, discount unwinding and closing balance.
Disclosures and current proposals
Disclose the nature, expected timing, uncertainties, major assumptions, movements and reimbursements as required. The IASB is working on targeted improvements to IAS 37, but proposals and tentative decisions are not current requirements until final amendments are issued and effective.
Read the separate guide to contingent assets and connect provision judgements to materiality and accounting estimates.
Common mistakes
- recognising a provision for planned future spending;
- creating general reserves to smooth profit;
- ignoring constructive obligations;
- offsetting expected asset-sale proceeds;
- failing to discount a material long-term obligation;
- including future operating losses in restructuring provisions;
- treating current IASB proposals as already effective.
Controls over provision estimates
Assign responsibility for each material provision, reconcile legal and operational evidence, challenge assumptions, compare prior estimates with actual settlements and obtain appropriate approval. Significant changes should be supported by new facts rather than used to manage reported profit.
Key takeaway
A provision represents a present obligation, not a general expectation of future cost. Recognition, measurement and disclosure depend on evidence about the past event, probability of outflow, estimation uncertainty and the entity’s realistic alternatives.
Official references: IAS 37 Provisions, Contingent Liabilities and Contingent Assets and IASB Provisions—Targeted Improvements project.