International Accounting Standards Board (UK)


IAS 37: Provisions, Contingent Liabilities and Contingent Assets



IAS 37, Provisions, Contingent Liabilities and Contingent Assets, was approved by the IASC Board in July 1998 and became operative for annual financial statements covering periods beginning on or after 1 July 1999.

Summary of IAS 37

IAS 37 requires that:

  • provisions should be recognised in the balance sheet when, and only when: an enterprise has a present obligation (legal or constructive) as a result of a past event; it is probable (i.e. more likely than not) that an outflow of resources embodying economic benefits will be required to settle the obligation; and a reliable estimate can be made of the amount of the obligation;
  • provisions should be measured in the balance sheet at the best estimate of the expenditure required to settle the present obligation at the balance sheet date, in other words, the amount that an enterprise would rationally pay to settle the obligation, or to transfer it to a third party, at that date. For this purpose, an enterprise should take risks and uncertainties into account. However, uncertainty does not justify the creation of excessive provisions or a deliberate overstatement of liabilities. An enterprise should discount a provision where the effect of the time value of money is material and should take future events, such as changes in the law and technological changes, into account where there is sufficient objective evidence that they will occur;
  • the amount of a provision should not be reduced by gains from the expected disposal of assets (even if the expected disposal is closely linked to the event giving rise to the provision) nor by expected reimbursements (for example, through insurance contracts, indemnity clauses or suppliers’ warranties). When it is virtually certain that reimbursement will be received if the enterprise settles the obligation, the reimbursement should be recognised as a separate asset; and
  • a provision should be used only for expenditures for which the provision was originally recognised and should be reversed if an outflow of resources is no longer probable.

IAS 37 sets out three specific applications of these general requirements:

  • a provision should not be recognised for future operating losses;
  • a provision should be recognised for an onerous contract - a contract in which the unavoidable costs of meeting the obligations under the contract exceed the expected economic benefits; and
  • a provision for restructuring costs should be recognised only when an enterprise has a detailed formal plan for the restructuring 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. For this purpose, a management or board decision is not enough. A restructuring provision should exclude costs - such as retraining or relocating continuing staff, marketing or investment in new systems and distribution networks - that are not necessarily entailed by the restructuring or that are associated with the enterprise’s ongoing activities.

IAS 37 prohibits the recognition of contingent liabilities and contingent assets. An enterprise should disclose a contingent liability, unless the possibility of an outflow of resources embodying economic benefits is remote, and disclose a contingent asset if an inflow of economic benefits is probable.