Financial Accounting · Disclosure notes

IAS 37 Provisions, Contingent Liabilities and Assets Disclosure

Updated 11 October 2026 · Fact-checked

IAS 37 says you recognise a provision when there is a present obligation from a past event, an outflow is probable (more likely than not), and you can estimate it reliably. A possible obligation or an unlikely or unreliable one is a contingent liability: disclose it. A probable inflow is a contingent asset: disclose only.

Understand IAS 37 Provisions, Contingent Liabilities and Assets Disclosure

A provision is a liability of uncertain timing or amount. Examples are a warranty cost, a legal claim or a restructuring cost. Because it is a liability, it goes in the statement of financial position and the expense goes in profit or loss.

IAS 37 gives three tests for recognition. First, the entity has a present obligation (legal or constructive) as a result of a past event. Second, an outflow of economic benefits is probable, meaning more likely than not. Third, the amount can be estimated reliably. All three must be met. If any one fails, you do not recognise a provision.

A contingent liability is either a possible obligation whose existence depends on an uncertain future event, or a present obligation that fails the probable test or cannot be measured reliably. You do not recognise it. You disclose it in the notes, unless the chance of an outflow is remote. If the chance is remote, you say nothing.

A contingent asset is a possible asset arising from a past event, confirmed only by an uncertain future event outside the entity's control. You never recognise it. If an inflow is probable, you disclose it. If an inflow is virtually certain, it is no longer contingent, so it is an ordinary asset and you recognise it.

The note for provisions shows, for each class, the opening balance, additions, amounts used, unused amounts reversed, and the closing balance. It also gives a brief description of the nature of the obligation and the expected timing of outflows.

Key formulas to remember

Provision recognition tests: Present obligation from a past event AND outflow probable (> 50%) AND reliable estimate → recognise a provision; All three conditions are needed. If one fails, treat as a contingent liability.
Contingent liability treatment: Possible obligation, or present obligation not probable or not measurable → disclose; if outflow remote → no disclosure; Never recognise in the statement of financial position.
Contingent asset treatment: Inflow virtually certain → recognise as an asset; inflow probable → disclose; otherwise → ignore; Be more cautious with assets than with liabilities.
Provision note reconciliation: Closing balance = Opening balance + Additions − Amounts used − Unused amounts reversed; Shown for each class of provision. Unwinding of discount is also included where discounting applies.
Measurement: Provision = best estimate of the expenditure needed to settle the obligation at the reporting date; Discount to present value if the effect is material.

How to solve IAS 37 Provisions, Contingent Liabilities and Assets Disclosure questions

Use this order for any IAS 37 question. It works for both recognition and disclosure questions.

1Identify the past event. Ask what happened on or before the reporting date that created the situation.
2Decide whether there is a present obligation at the reporting date, legal or constructive. A future intention to spend money is not an obligation.
3Judge the likelihood of an outflow: probable (more likely than not), possible, or remote.
4Check whether the amount can be reliably estimated.
5Apply the rule: all tests met means provision; otherwise contingent liability (disclose unless remote). For an inflow, virtually certain means asset, probable means disclose, otherwise nothing.
6If a provision is needed, post the entry: debit expense, credit provision. For a change in an existing provision, post only the increase or decrease.
7Write the disclosure: class, opening balance, additions, used, reversed, closing balance, nature and timing.

Quickest way: Three-question filter

When to use it: Use this for multiple choice questions where you have under a minute to decide.

Is there an obligation now, caused by something that already happened? If no, no provision.
Is payment more likely than not, and can you put a number on it? If both yes, provision.
If not, ask how likely it is. Remote means nothing, anything else means note only. For gains, only note if probable, and recognise only if virtually certain.

Common mistakes in IAS 37 Provisions, Contingent Liabilities and Assets Disclosure

Recognising a provision for future operating losses or for a planned repair.
Students feel the cost is certain to arise, so they accrue it.
Fix: Check for a past event creating an obligation. Future losses and repairs the entity could avoid have no present obligation, so no provision.
Recognising a contingent asset because the lawyer says a win is likely.
Students treat assets and liabilities symmetrically.
Fix: A probable gain is only disclosed. Recognise it only when it is virtually certain.
Treating 'probable' as meaning 'certain' or 'above 75%'.
Everyday use of the word suggests a high bar.
Fix: In IAS 37, probable means more likely than not, so anything above 50%.
Disclosing every contingent liability, including remote ones.
Students think more disclosure is safer.
Fix: If the chance of an outflow is remote, there is no disclosure at all.
Charging the full provision to profit or loss again in the following year.
Students forget the opening balance already exists.
Fix: Only the movement goes through profit or loss. An increase is an extra charge. A decrease is a credit.

Worked examples

Example 1

At 1 January, Zeta Co had a warranty provision of $40,000. During the year $12,000 of claims were settled and charged against the provision. At 31 December the best estimate of the amount needed is $55,000. No amounts were reversed. Prepare the provision note movement.

Show the solution

Opening balance: $40,000.
Amounts used: $12,000 (deducted).
Closing balance required: $55,000.
Balance before any addition: 40,000 − 12,000 = $28,000.
Addition needed: 55,000 − 28,000 = $27,000.
Check: 40,000 + 27,000 − 12,000 = $55,000.

Answer: Opening $40,000 + additions $27,000 − used $12,000 = closing $55,000. The $27,000 addition is charged to profit or loss.

Example 2

Delta Co is being sued by a customer. Lawyers say it is more likely than not that Delta will lose, with damages of $90,000 being a reliable estimate. Separately, Delta is claiming $30,000 from a supplier, and its lawyers say success is probable but not certain. How should each be treated?

Show the solution

Lawsuit against Delta: the past event is the alleged faulty product sold. There is a present obligation.
An outflow is probable (more likely than not) and the amount is reliably estimated at $90,000. All three tests are met.
Recognise a provision: debit expense $90,000, credit provision $90,000.
Claim by Delta: this is a possible inflow, so a contingent asset.
Inflow is probable but not virtually certain. Do not recognise it. Disclose it in the notes.

Answer: Recognise a $90,000 provision for the lawsuit. Disclose the $30,000 claim as a contingent asset without recognising it.

Exam tips

Memorise the grid: virtually certain, probable, possible, remote. Most objective test questions are a test of placing a case in the right box.
Watch for words like 'possible', 'could' and 'may'. They usually signal a contingent liability, not a provision.
In number entry questions on the note, work through opening + additions − used − reversed and check you reach the stated closing balance.
In multiple response questions, check each option separately against the three recognition tests rather than choosing by feel.
Remember that a contingent asset is never recognised unless virtually certain, so the answer 'recognise as an asset' for a merely probable gain is almost always wrong.

Practice questions from Disclosure notes

IAS 37 Provisions, Contingent Liabilities and Assets Disclosure in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

IAS 37 Provisions, Contingent Liabilities and Assets Disclosure: frequently asked questions

What is the difference between a provision and a contingent liability?

A provision is recognised in the statement of financial position because there is a present obligation, a probable outflow and a reliable estimate. A contingent liability fails at least one of these tests, so it is only disclosed in the notes, unless the outflow is remote.

How do you treat a contingent asset under IAS 37?

You do not recognise it unless the inflow is virtually certain, in which case it is no longer contingent. If an inflow is probable, you disclose it in the notes. If it is only possible, you do nothing.

What must the provisions note show?

For each class of provision it shows the opening balance, additions, amounts used, unused amounts reversed and the closing balance. It also describes the nature of the obligation and when outflows are expected.

Does probable mean more than 50%?

Yes. IAS 37 uses probable to mean more likely than not. That is a lower bar than many students assume.