What Is a Provision Under IAS 37?
A provision is a liability of uncertain timing or amount — but only if three conditions are met. Here's the IAS 37 definition, the recognition test, and how provisions differ from contingencies.
Under IAS 37, a provision is a liability of uncertain timing or amount. It's recognised in the financial statements only when three conditions are all met — which is exactly what examiners test, because companies often want to recognise provisions they shouldn't (to smooth profits) or avoid ones they should.
The three recognition conditions
- There is a present obligation — legal or constructive — arising from a past event.
- It is probable that an outflow of economic benefits will be required to settle it.
- A reliable estimate can be made of the amount.
If any one of these fails, no provision is recognised. A 'constructive' obligation arises where an established pattern of past practice or a public statement has created a valid expectation in others that the entity will act — it doesn't have to be legally enforceable.
Provisions versus contingent liabilities
Where an obligation is only possible (rather than probable), or the outflow isn't probable, or it can't be reliably estimated, it's a contingent liability — disclosed in the notes, not recognised. A contingent asset (a possible inflow) is only disclosed when probable and never recognised until virtually certain. This prudent asymmetry is a favourite exam point.
Measurement
A provision is measured at the best estimate of the expenditure required to settle the obligation — for a single item, the most likely outcome; for a large population, the expected value. Onerous contracts and restructuring provisions have their own specific rules worth knowing.
Applying the recognition test to a scenario — deciding provision, disclose, or ignore — is where FR marks are won. The 50% Club marks your practice FR answers against the official ACCA scheme, showing exactly where a recognition judgement or a contingency call cost you a mark.