Last reviewed: July 2026.
A restructuring provision is recognised under IAS 37 only when a restructuring creates a present obligation at the reporting date. A management decision, private plan or forecast of future costs is not enough by itself.
The entity normally needs a detailed formal plan and must have created a valid expectation in those affected that the restructuring will be carried out, usually by starting implementation or announcing the main features.
What is a restructuring?
A restructuring is a programme planned and controlled by management that materially changes either the scope of a business or the manner in which it is conducted.
- sale or termination of a line of business;
- closure of business locations in a country or region;
- relocation of activities between regions;
- changes in management structure, such as removing a management layer;
- fundamental reorganisation that materially affects the nature and focus of operations.
Recognition conditions
A provision is recognised only when all normal IAS 37 conditions are met:
- there is a present legal or constructive obligation from a past event;
- an outflow of economic resources is probable; and
- a reliable estimate can be made.
For restructuring, the constructive obligation normally requires a detailed formal plan and a valid expectation among those affected.
What a detailed plan should identify
- the business or part of the business concerned;
- the principal locations affected;
- the location, function and approximate number of employees to be compensated;
- the expenditures to be undertaken;
- the expected implementation date.
The plan must be specific enough that affected parties can reasonably understand what the entity intends to do.
When announcement creates an obligation
An announcement may create a constructive obligation when it communicates the main features of the plan in a sufficiently specific manner and creates a valid expectation of implementation.
A vague statement that the entity “expects to reduce costs” or “may close locations” does not normally create a present obligation.
Board approval is not always enough
Board approval before year end does not automatically justify a provision. If the decision remains private and implementation has not started, the entity may still be able to avoid the expenditure.
Recognition focuses on the obligation created by past events, not merely management intention.
Costs included in a restructuring provision
The provision includes only direct expenditures that are necessarily caused by the restructuring and are not associated with the entity’s continuing activities.
- qualifying employee termination payments;
- contract cancellation penalties directly caused by closure;
- other unavoidable direct closure costs that meet the definition.
Costs excluded from the provision
- retraining or relocating continuing employees;
- marketing and advertising for the reorganised business;
- investment in new systems and distribution networks;
- expected future operating losses;
- general future administration costs;
- costs of continuing operations.
These costs are recognised when incurred or accounted for under another Standard.
Worked example
On 15 December, a company approves a detailed plan to close a factory. On 20 December it announces the closure to employees and customers and specifies the location, timetable and termination arrangements.
Estimated qualifying termination benefits are 600,000 CU and unavoidable contract cancellation penalties are 90,000 CU. Retraining costs are 120,000 CU and marketing for the replacement facility is 50,000 CU.
The restructuring provision is 690,000 CU. Retraining and marketing are excluded because they relate to future activities.
Journal entry
- Debit restructuring expense 690,000 CU
- Credit restructuring provision 690,000 CU
Payments subsequently reduce the provision. The estimate is reviewed at each reporting date and adjusted for updated evidence.
Sale of an operation
A provision for selling an operation is not recognised merely because management has decided to sell. A binding sale agreement may be needed before an unavoidable obligation exists.
Assets may separately require impairment testing or classification under another Standard. Do not use the restructuring provision to absorb asset write-downs.
Employee termination benefits
Termination benefits are analysed under the relevant employee-benefit requirements. The timing of recognition can depend on when the entity can no longer withdraw the offer and when restructuring costs are recognised.
Maintain a reconciliation between the restructuring provision and separately measured employee obligations.
Measurement and discounting
Measure the provision at the best estimate of expenditure required to settle the present obligation. Consider risks, uncertainty and the time value of money where material.
Use the broader IAS 37 provisions guide for measurement, discounting and disclosure principles.
Disclosure
Disclose the nature of the obligation, expected timing, uncertainties, major assumptions and a reconciliation of opening and closing balances. Material restructuring plans may also require explanation of their effect on operations and going concern.
Apply the materiality judgement process and review the going concern assessment guide.
Current IASB project
The IASB is completing targeted improvements to IAS 37. As of July 2026, final amendments are the next milestone. Exposure-draft proposals and tentative decisions are not current requirements until final amendments are issued and effective.
Common mistakes
- recognising a provision based only on a board decision;
- including future operating losses;
- including retraining, marketing and new systems;
- recognising asset impairment inside the provision;
- using a vague public announcement as proof of an obligation;
- failing to update the estimate and disclosures.
Key takeaway
A restructuring provision requires a present obligation, not merely a plan. Include only unavoidable direct costs caused by the restructuring and exclude future operating and improvement expenditure.
Official references: IAS 37 Provisions, Contingent Liabilities and Contingent Assets and IASB Provisions—Targeted Improvements project.