IAS 37 Provisions, Contingent Liabilities and Contingent Assets: Key Requirements and Examples

Scope and key definitions

The standard applies to all entities in accounting for provisions, contingent liabilities and contingent assets, except obligations under executory contracts (unless onerous) and items covered by another standard (para. 1). Financial instruments within IFRS 9, including guarantees, are outside IAS 37 (para. 2).

• A provision is a liability of uncertain timing or amount (para. 10).
• A legal obligation arises from a contract, legislation or other operation of law (para. 10).
• A constructive obligation arises from the entity's actions: an established pattern of practice, published policies or a sufficiently specific current statement that has created valid expectations in other parties (para. 10). An example from the standard summary is a retailer's policy to make refunds to customers.
• A contingent liability is a possible obligation whose existence will be confirmed by uncertain future events not wholly within the entity's control, or a present obligation that is not recognised because an outflow is not probable or the amount cannot be measured reliably (para. 10).
• An onerous contract is one in which the unavoidable costs of meeting the obligations exceed the economic benefits expected under it (para. 10).

When a provision is recognised: three conditions

A provision is recognised only when all three conditions are met: the entity has a present (legal or constructive) obligation as a result of a past event; an outflow of resources to settle it is probable; and the amount can be estimated reliably. If any condition is not met, no provision is recognised (para. 14).

"Probable" means more likely than not (para. 23). In disputed cases, such as a lawsuit, the entity takes account of all available evidence, including expert opinion and events after the reporting period. If it is more likely than not that a present obligation exists at the period end, a provision is recognised; if it is less likely, a contingent liability is disclosed unless the outflow is remote (para. 16).

The obligation must arise from a past event independently of the entity's future actions. Fines and the costs of cleaning up unlawful environmental damage are examples (para. 19). Plans to spend money in future because of commercial pressure or new requirements do not create a provision: the entity can avoid that spending by changing how it operates.

Where there are many similar obligations (for example, product warranties), the probability of an outflow is assessed for the class as a whole: even if it is small for each contract, an outflow for the class may be probable, and then a provision is recognised (para. 24).

Measuring the provision

A provision is recognised at the best estimate of the expenditure required to settle the obligation at the end of the reporting period (para. 36), that is, the amount the entity would rationally pay to settle the obligation or transfer it to a third party at that date (para. 37).

For a large population of similar items the expected value method is used: all possible outcomes are weighted by their probabilities (para. 39). The standard's example: goods are sold with a 6-month warranty; if all goods sold had minor defects, repairs would cost 1 million; if all had major defects, 4 million. Experience shows that 75% of goods will have no defects, 20% minor and 5% major defects. Expected value: 75% × 0 + 20% × 1 million + 5% × 4 million = 400,000.

For a single obligation the most likely outcome may be the best estimate, but the entity also considers other possible outcomes: if further repair attempts are likely, a larger provision is recognised (para. 40).

• Where the time value of money is material, the provision is discounted to the present value of the expected expenditure (para. 45) using a pre-tax rate reflecting current market assessments of the time value of money and the risks specific to the liability (para. 47).
• A reimbursement from a third party (an insurer or supplier) is recognised as a separate asset only when it is virtually certain, and may not exceed the provision (para. 53).
• Provisions are reviewed at the end of each reporting period; if an outflow is no longer probable, the provision is reversed (para. 59).

Special cases: future losses, onerous contracts, restructuring

• No provision is recognised for future operating losses (para. 63): at the reporting date there is no obligation.
• For an onerous contract the present obligation is recognised and measured as a provision (para. 66). Unavoidable costs are the lower of the cost of fulfilling the contract and any compensation or penalties for failing to fulfil it (para. 68).
• A constructive obligation to restructure arises only when there is a detailed formal plan (the business affected, principal locations, the location, function and approximate number of employees to be compensated, the expenditure and the timing) and the entity has raised a valid expectation in those affected by starting to implement the plan or announcing its main features (para. 72).

Contingent liabilities and contingent assets

A contingent liability is not recognised on the balance sheet (para. 27) but is disclosed unless the outflow is remote (para. 28). For each class the entity discloses a brief description and, where practicable, an estimate of the financial effect, the uncertainties about amount or timing and the possibility of reimbursement (para. 86). A typical example is a claim against the entity where it is unclear whether it committed a wrongdoing and settlement is not probable.

A contingent asset is not recognised either (para. 31), since that could mean recognising income that may never be realised. It is disclosed where an inflow of economic benefits is probable (paras. 34, 89). When the realisation of income is virtually certain, the asset is no longer contingent and is recognised (para. 33).

In extremely rare cases disclosure could seriously prejudice the entity's position in a dispute. The details may then be omitted, but the entity discloses the general nature of the dispute, together with the fact that, and the reason why, the information has not been disclosed (para. 92).

What to disclose in the notes

• For each class of provision, a reconciliation: carrying amount at the beginning and end of the period, additional provisions and increases, amounts used, unused amounts reversed, and the increase in the discounted amount from the passage of time and changes in the discount rate; comparatives are not required (para. 84).
• A brief description of the nature of the obligation and the expected timing of outflows, the uncertainties about amount or timing, and major assumptions about future events (para. 85).
• The amount of any expected reimbursement and of any asset recognised for it (para. 85).

IAS 37 and tax in Uzbekistan

Public interest entities, among others, report under IFRS: from 1 January of the year following their inclusion in the Register they keep their books under IFRS, and after the second year they publish financial statements together with the auditor's report (Presidential Resolution PP-282 of 15.09.2025).

Tax accounting does not mirror IFRS provisions. Allocations to reserves not provided for by the Tax Code or legislation are not deductible, except expenses within the limits of Articles 315, 316 and 326 of the Tax Code (Article 317, item 23). Article 316 allows a reserve for warranty repairs and service, but its ceiling is based on the actual share of warranty costs in revenue over the previous three years. So a provision for a lawsuit or an onerous contract usually reduces IFRS profit but not the tax base, creating a temporary difference for deferred tax under IAS 12.