Financial Reporting · Provisions and events after the reporting period

Provisions, Contingent Liabilities and Contingent Assets (IAS 37)

Updated 11 October 2026 · Fact-checked

IAS 37 says you recognise a provision only when there is a present obligation from a past event, an outflow of economic benefits is probable, and the amount can be estimated reliably. If not, you disclose a contingent liability (unless remote). Contingent assets are only disclosed when an inflow is probable.

Understand Provisions, Contingent Liabilities and Assets (IAS 37)

A provision is a liability of uncertain timing or amount. You owe something, but you do not know exactly when you will pay or how much. Examples are a warranty claim or a legal case you are likely to lose.

IAS 37 stops companies from booking costs for things that have not happened yet. It also stops them from hiding real obligations. The test is the same each time: is there an obligation today, caused by something that has already happened?

The obligation can be legal (from a contract or law) or constructive. A constructive obligation arises when the entity's past practice or published statements create a valid expectation in others that it will accept responsibility. Intention alone is not enough. A future operating cost with no present obligation, such as the cost of a planned repair that you could avoid, is not a provision.

A contingent liability is either a possible obligation, whose existence depends on an uncertain future event outside your control, or a present obligation that fails recognition because an outflow is not probable or the amount cannot be measured reliably. You do not recognise it. You disclose it, unless the chance of outflow is remote.

A contingent asset is a possible asset arising from past events, confirmed only by uncertain future events outside your control. You never recognise it. You disclose it only if an inflow is probable. If the inflow is virtually certain, it is no longer contingent and you recognise the asset.

Key rules to remember

Recognition criteria for a provision: Present obligation (legal or constructive) from a past event AND outflow probable AND reliable estimate; All three must be met. If any one fails, no provision is recognised.
Meaning of probable: Probable = more likely than not (above 50%); Used for recognising provisions, both for whether a present obligation exists and for whether an outflow is probable. It is also used for disclosing contingent assets.
Provision decision: All three criteria met → recognise provision; Debit the expense (or asset where applicable), credit provision liability.
Contingent liability treatment: Possible obligation, or present obligation failing recognition → disclose unless outflow is remote; No entry in the statement of financial position.
Contingent asset treatment: Inflow probable → disclose; inflow virtually certain → recognise as an asset; otherwise → ignore; Be prudent: gains are recognised later than losses.

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

Use the same decision path for every IAS 37 scenario. Write it out briefly in the constructed response, and run it in your head for objective questions.

1Identify the past event. Has something already happened by the reporting date, such as a sale with a warranty, a lawsuit trigger or damage caused?
2Ask whether there is a present obligation, legal or constructive. If you could avoid the cost by your future actions, there is none.
3Judge the likelihood of an outflow: probable (more likely than not), possible, or remote.
4Check whether a reliable estimate can be made. Only in extremely rare cases is this not possible.
5Apply the outcome: all criteria met means recognise a provision; possible obligation or unreliable estimate means disclose a contingent liability; remote means do nothing.
6For any possible gain, classify it as a contingent asset. Disclose only if probable; recognise only if virtually certain.
7Post the journal entry if a provision is recognised, and state the disclosure if not. Always give a one-line reason.

Quickest way: Three-test, three-outcome shortcut

When to use it: Use this for Section A and Section B objective questions where time is tight and you must pick one answer.

Test 1: Is there an obligation now from a past event? If there is no present obligation, there is no provision. If it is only a possible obligation, consider a contingent liability disclosure (unless remote).
Test 2: Is an outflow probable (over 50%)? If an outflow is only possible (not remote), disclose a contingent liability; if remote, no disclosure.
Test 3: Can you estimate it reliably? If yes, recognise a provision. If no reliable estimate is possible (extremely rare), disclose a contingent liability.
Remote outflow means no disclosure at all.
For gains, remember the ladder: virtually certain means asset, probable means disclose, anything less means ignore.

Common mistakes in Provisions, Contingent Liabilities and Assets (IAS 37)

Providing for future operating losses or planned future costs.
Students feel a future cost is certain, so it should be booked now.
Fix: Check for a present obligation from a past event. Future operating losses have none, so no provision is made.
Recognising a provision for a possible (not probable) outflow.
Students treat any risk as enough to book a liability.
Fix: Probable means more likely than not. If it is merely possible, disclose a contingent liability instead.
Recognising a contingent asset because a gain looks likely.
Students apply the same logic to gains as to losses.
Fix: Recognise an asset only when the inflow is virtually certain. If probable, disclose only.
Disclosing a contingent liability when the outflow is remote.
Students think all contingencies must be mentioned.
Fix: Remote means no disclosure. Disclose only possible obligations or present obligations that fail recognition.
Ignoring constructive obligations.
Students look only for a contract or law.
Fix: Look for past practice, published policy or announcements that created a valid expectation in others.
Confusing a provision with an accrual.
Both are liabilities for expenses.
Fix: An accrual is for goods or services received and invoiced or agreed, with little uncertainty. A provision has uncertain timing or amount.

Worked examples

Example 1

At the reporting date, Delta Co is defending a legal claim for damages after a customer was injured by a faulty product sold in the year. Lawyers advise it is probable that Delta will lose and that the best estimate of damages is ₹40,00,000. Show the treatment.

Show the solution

Past event: the sale of the faulty product, which has occurred.
Present obligation: the lawyers advise Delta will probably lose, so it is more likely than not that a present obligation exists.
Outflow: probable, as the lawyers advise.
Reliable estimate: ₹40,00,000.
All three criteria are met, so recognise a provision.
Journal: Debit legal expense (profit or loss) ₹40,00,000; credit provision ₹40,00,000.

Answer: Recognise a provision of ₹40,00,000 and charge ₹40,00,000 to profit or loss. Also disclose the nature of the obligation and the uncertainties.

Example 2

Echo Co has two matters at the reporting date. (a) It is suing a supplier for breach of contract. Its lawyers say a win is probable, with likely receipts of ₹15,00,000. (b) A competitor has begun action claiming damages; Echo's lawyers say a loss is possible but not probable. Whether Echo has a present obligation is uncertain, but on the evidence available at the reporting date it is more likely than not that no present obligation exists. Show the treatment of each.

Show the solution

(a) This is a possible gain, so it is a contingent asset.
The inflow is probable but not virtually certain, so it is not recognised.
Disclose the contingent asset, with a brief description and the estimated financial effect of ₹15,00,000 if practicable.
(b) Judge whether a present obligation exists using the evidence available at the reporting date. That evidence indicates it is more likely than not that no present obligation exists.
So there is only a possible obligation, and the lawyers regard an outflow as possible but not probable. The recognition criteria are not met, so no provision is made.
This is a contingent liability.
The chance of an outflow is possible, not remote, so disclose it.

Answer: (a) No asset is recognised; disclose the contingent asset of ₹15,00,000. (b) No provision is recognised, because the evidence indicates it is more likely than not that no present obligation exists. Disclose a contingent liability with a description of the claim and its possible financial effect.

Exam tips

In Section B scenarios, underline the words 'probable', 'possible' and 'virtually certain'. The answer usually turns on one of them.
Use the exact IAS 37 labels in written answers: present obligation, past event, probable outflow, reliable estimate.
Always give the journal when a provision is recognised, and the disclosure wording when it is not. Examiners award marks for both.
Watch for traps: a board decision to restructure, future repairs or future losses often have no present obligation.
Objective test questions are marked all or nothing: a wrong answer scores zero and there are no part marks. Separately, work through the three tests in order so you reach the right answer.

Practice questions from Provisions and events after the reporting period

Provisions, Contingent Liabilities and Assets (IAS 37) in other exams

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

Provisions, Contingent Liabilities and Assets (IAS 37): 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 the obligation exists, an outflow is probable and the amount can be estimated reliably. A contingent liability is not recognised. It is disclosed because the obligation is only possible or the recognition criteria are not all met.

What does probable mean in IAS 37?

Probable means more likely than not to occur. In practice, think of it as a likelihood above 50%. It is a judgement, so read the facts in the question carefully.

Do you ever recognise a contingent asset?

Not while it is contingent. If the inflow becomes virtually certain, the asset is no longer contingent and you recognise it. If the inflow is only probable, you disclose it.

Is a contingent liability ever recorded in the financial statements?

It is not recognised in the statement of financial position or profit or loss. It appears only in the notes as a disclosure, and not at all if the outflow is remote.