Financial Reporting · Provisions and events after the reporting period

Measurement of Provisions under IAS 37 Explained

Updated 11 October 2026 · Fact-checked

IAS 37 says a provision is measured at the best estimate of the expenditure needed to settle the obligation at the reporting date. Use expected value for large populations of items, and the most likely outcome for a single obligation. Discount if the effect is material, and show reimbursements as a separate asset.

Understand Measurement of Provisions

Once you decide a provision must be recognised, the next question is how much. IAS 37 gives one principle: the amount is the best estimate of the expenditure required to settle the present obligation at the reporting date. That means the amount the entity would rationally pay to settle the obligation or transfer it to a third party at that date.

The method depends on what you are measuring. For a large population of items, such as warranty claims on thousands of products, use expected value. You weight each possible outcome by its probability and add them up. For a single obligation, such as one lawsuit, the most likely outcome is usually the best estimate. But if other outcomes are mostly higher or mostly lower, the best estimate may be a higher or lower amount. The exam usually tells you which approach to take.

Money paid in the future is worth less than money paid today. So where the time value of money is material, the provision is the present value of the expected cash outflows. You use a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the liability. Do not double count risk: if risk is already in the cash flows, leave it out of the rate. Each year the discount unwinds. The unwinding of discount is recognised as a finance cost in profit or loss. It increases the provision. It is not added to the asset cost.

Some things you must not do. You cannot provide for future operating losses, because there is no present obligation from a past event. Expected gains from the disposal of assets are not taken into account in measuring a provision. If the entity has an onerous contract, the unavoidable costs of meeting it exceed the benefits, and a provision is made for the lower of the cost of fulfilling it and the cost of exiting it.

If another party will repay some or all of the cost, that is a reimbursement. Recognise it as a separate asset only when it is virtually certain to be received if the entity settles the obligation. The asset cannot exceed the provision. In profit or loss, you may net the expense against the reimbursement. In the statement of financial position, you must not net them off. Review provisions at each reporting date and adjust them to the current best estimate.

Key rules to remember

Expected value: Expected value = Σ (probability × outcome); Use for a large population of similar items. Probabilities must add to 100%.
Present value of a provision: PV = future cash outflow ÷ (1 + r)ⁿ; r is the pre-tax discount rate and n is the number of years until settlement. Discount only if the effect is material.
Unwinding of discount: Finance cost for the year = opening provision × discount rate; Charge to profit or loss as a finance cost and add to the provision.
Single obligation: Best estimate ≈ most likely outcome; Adjust upwards or downwards if other possible outcomes are mostly higher or lower.
Reimbursement: Asset recognised only if virtually certain, and ≤ provision; Present the asset separately from the provision in the statement of financial position.

How to solve Measurement of Provisions questions

Use this order for any measurement question on provisions.

1Confirm that a provision is recognised: present obligation, probable outflow and reliable estimate. If not, stop.
2Decide the approach: expected value for a large population, most likely outcome for a single obligation.
3Calculate the undiscounted best estimate at the reporting date. Ignore future operating losses and gains on disposal.
4Check whether the time value of money is material. If so, discount at the pre-tax rate for the number of years to settlement.
5Work out the unwinding of discount for later years as opening provision × rate, and add it to the provision as a finance cost.
6Deal with any reimbursement: recognise a separate asset only if virtually certain, capped at the provision.
7Write the journal and state the profit or loss and statement of financial position effect, including the change from the previous year's provision.

Quickest way: Three-question check

When to use it: Use this in Section A and Section B objective questions where you have about three minutes per question.

Ask: one obligation or many items? Many items means expected value, one means most likely.
Ask: is a discount rate and a settlement date given? If yes, divide by (1 + r)ⁿ.
Ask: is a reimbursement mentioned? If it is only possible or probable, ignore it in the numbers and do not recognise an asset.
Check the answer asked for: closing provision, the charge to profit or loss, or the finance cost. Do not give a different figure.

Common mistakes in Measurement of Provisions

Using the most likely outcome for a large population such as warranties.
Students pick the single biggest probability because it feels simpler.
Fix: Whenever the question mentions many units or claims, calculate the expected value across all outcomes.
Providing for future operating losses.
Expected losses feel like a real cost, so students accrue them.
Fix: Remember there is no present obligation from a past event. Only onerous contracts are an exception, and that is a separate rule.
Netting a reimbursement against the provision in the statement of financial position.
The net figure seems to show the real cost to the entity.
Fix: Show the provision as a liability and the reimbursement as a separate asset. Only the expense in profit or loss may be shown net.
Recognising a reimbursement that is only probable.
Students confuse the recognition test for provisions with the one for reimbursements.
Fix: The test for the reimbursement asset is virtually certain. Anything less is at most a contingent asset disclosure.
Adding the unwinding of discount to the cost of the related asset or ignoring it.
Students link it to a decommissioning asset and forget the finance cost.
Fix: Unwinding always goes to finance costs in profit or loss, and the provision increases by the same amount.
Discounting at the post-tax rate or at the wrong number of years.
Rates and dates are in the scenario and are used carelessly.
Fix: Use the pre-tax rate given. Count the years from the reporting date to the expected settlement date.

Worked examples

Example 1

Delta sells products with a one-year warranty. At the reporting date, past experience shows that 80% of items sold will have no defects, 15% will have minor defects costing ₹2,00,000 in total to repair, and 5% will have major defects costing ₹10,00,000 in total to repair. Calculate the warranty provision.

Show the solution

The warranty obligation covers a large population of items, so use expected value.
No defects: 80% × ₹0 = ₹0.
Minor defects: 15% × ₹2,00,000 = ₹30,000.
Major defects: 5% × ₹10,00,000 = ₹50,000.
Total expected value = ₹0 + ₹30,000 + ₹50,000 = ₹80,000.
Time value of money is not material for a one-year warranty, so do not discount.

Answer: The warranty provision is ₹80,000. Debit warranty expense and credit provision, adjusting for any opening provision.

Example 2

At 31 December Year 1, Sigma must pay ₹5,00,000 to clean a site in 2 years' time. This arises from damage already done. The pre-tax discount rate is 10%. Sigma expects its insurer to repay ₹1,00,000 of the cost, and this is virtually certain. Show the amounts at 31 December Year 1 and the finance cost for Year 2.

Show the solution

The obligation exists at the reporting date, so a provision is recognised.
Discount the cash outflow: ₹5,00,000 ÷ (1.10)² = ₹5,00,000 ÷ 1.21 = ₹4,13,223 (rounded).
Provision at 31 December Year 1 = ₹4,13,223.
The reimbursement is virtually certain, so recognise a separate asset. Do not exceed the provision. The ₹1,00,000 is below ₹4,13,223, so it is allowed. If the reimbursement is also to be received in 2 years' time, discount it the same way: ₹1,00,000 ÷ 1.21 = ₹82,645 (rounded).
In profit or loss, the net expense is ₹4,13,223 − ₹82,645 = ₹3,30,578. The two items may be netted in profit or loss but not in the statement of financial position.
Unwinding in Year 2 on the provision = ₹4,13,223 × 10% = ₹41,322 (rounded). The provision at 31 December Year 2 is ₹4,13,223 + ₹41,322 = ₹4,54,545 (rounded). Check: ₹5,00,000 ÷ 1.10 = ₹4,54,545.

Answer: Provision ₹4,13,223 as a liability and a separate reimbursement asset of ₹82,645, assuming the reimbursement is also received in 2 years. The finance cost for Year 2 is ₹41,322 and the closing provision is ₹4,54,545.

Exam tips

Read the scenario for the word 'population' or a list of probabilities. That signals expected value.
In Section A, a possible reimbursement is usually a trap. Check whether it is virtually certain before including an asset.
In Section C, set out the discount working clearly, even if you slip on arithmetic. Marks go for method, such as the correct rate and years.
When asked for the profit or loss charge, separate the operating expense from the finance cost. Examiners often award marks for both lines.
If a question mentions future losses of an operating division, your answer is almost always: no provision for them.

Practice questions from Provisions and events after the reporting period

Measurement of Provisions in other exams

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

Measurement of Provisions: frequently asked questions

When do I use expected value and when the most likely outcome?

Use expected value when the provision covers a large population of similar items, like warranty claims. Use the most likely outcome for a single obligation, such as one legal case. If other outcomes are mostly higher or lower, adjust the single-case estimate.

Do I always discount a provision?

No. You discount only when the effect of the time value of money is material. Short-term provisions, often due within a year, usually do not need discounting unless the question says otherwise.

Where does the unwinding of discount go?

It is a finance cost in profit or loss. You calculate it as the opening provision multiplied by the discount rate, and it increases the carrying amount of the provision.

How do I treat a reimbursement under IAS 37?

Recognise a separate asset only if receipt is virtually certain once the entity settles the obligation. The asset cannot be more than the provision. You may net the expense in profit or loss, but not in the statement of financial position.