Financial Reporting · Ind AS 37 Provisions, Contingent Liabilities and Contingent Assets

Measurement of Provisions under Ind AS 37 (CA Final FR)

Updated 5 October 2026 · Fact-checked

Under Ind AS 37, a provision is measured at the best estimate of the expenditure needed to settle the present obligation at the end of the reporting period. Use expected value for a large population of items and the most likely outcome for a single obligation. Adjust for risk, discount at a pre-tax rate if the time value 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. Ind AS 37 says: the amount recognised is the best estimate of the expenditure required to settle the present obligation at the end of the reporting period. It is the amount the entity would rationally pay to settle the obligation or to transfer it to a third party at that date.

The best estimate depends on the type of obligation. For a large population of items, such as warranties on thousands of products, use the expected value: 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 than the most likely one, the best estimate may be a higher or lower amount. Where there is a continuous range and each point is as likely as any other, use the mid-point.

Two adjustments follow. First, take account of risks and uncertainties. Caution is needed, but uncertainty does not justify excess provisions or deliberate overstatement of liabilities. Second, where the effect of the time value of money is material, the provision is the present value of the expected expenditure. The discount rate is a pre-tax 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. The unwinding of the discount in later years is recognised as a borrowing cost (finance cost), not as operating expense.

Finally, future events that may affect the amount, such as new technology or new law, are reflected only when there is sufficient objective evidence that they will occur. Gains from the expected disposal of assets are not taken into account, even if the disposal is closely linked to the event giving rise to the provision. If another party will reimburse some or all of the expenditure, recognise the reimbursement as a separate asset only when it is virtually certain it will be received if the entity settles the obligation. The asset cannot exceed the provision. In the statement of profit and loss, the expense for the provision may be shown net of the reimbursement.

Key rules to remember

Best estimate: large population: Expected value = Σ (Outcome × Probability); Used for many similar items such as warranties or refunds. Probabilities must add up to 100%.
Best estimate: single obligation: Most likely outcome (adjusted if other outcomes are mostly higher or lower); Also, for a continuous range with equal likelihood, use the mid-point.
Present value of provision: PV = Expected outflow ÷ (1 + r)ⁿ; Use a pre-tax rate. Apply only when the time value of money is material.
Unwinding of discount: Finance cost for the year = Opening provision × r; Recognised as borrowing cost. The provision rises to the full outflow by the settlement date.
Reimbursement: Separate asset recognised only if receipt is virtually certain; asset ≤ provision; Do not net off on the balance sheet. The profit and loss expense may be shown net.
Gains on disposal of assets: Ignored when measuring the provision; Even if the disposal is linked to the event that gave rise to the provision.

How to solve Measurement of Provisions questions

Use this order for any measurement question on provisions. It keeps your answer in the provision-facts-conclusion form and protects marks even if a number goes wrong.

1Confirm first that a provision is to be recognised: present obligation, probable outflow, reliable estimate. If not, measurement does not arise.
2Decide the type of obligation: a large population of items (use expected value) or a single obligation (use the most likely outcome, adjusted as needed).
3Compute the best estimate. For expected value, multiply each outcome by its probability and add.
4Strip out items that must not be included: gains on expected disposal of assets, and future events without sufficient objective evidence.
5Check materiality of time value. If material, discount the best estimate using a pre-tax rate for the expected settlement period.
6Deal with reimbursement separately. Recognise an asset only if receipt is virtually certain, limited to the provision amount.
7Pass the entries: expense for the provision, the reimbursement asset (if any), and the unwinding of discount as finance cost in later years.
8State the conclusion with the reason, referring to Ind AS 37 principles in one line.

Quickest way: Three-question check for measurement problems

When to use it: Use this in the exam hall for MCQs and for short written parts where you must decide the amount quickly.

Many similar items? Take the expected value. One item? Take the most likely outcome.
Is the money paid more than about a year away, and is discounting asked or the amount material? If yes, discount with the pre-tax rate. Otherwise, leave undiscounted.
Is someone else paying? Show the provision in full as a liability and the reimbursement as a separate asset only if virtually certain.
Cross out anything about asset sale gains or unsupported future events. They do not change the provision.

Common mistakes in Measurement of Provisions

Using the most likely outcome for a large population of items such as warranty claims.
Students remember 'most likely' from the single obligation rule and apply it everywhere.
Fix: Link the method to the population. Many items means expected value. One item means most likely outcome.
Netting the reimbursement against the provision on the balance sheet.
It feels logical that the net cost is what matters.
Fix: Show a full provision as a liability and the reimbursement as a separate asset. Only the profit and loss expense may be shown net.
Recognising the reimbursement when it is merely probable.
Students apply the 'probable' test used for provisions.
Fix: The test for a reimbursement asset is virtually certain. Anything weaker is a contingent asset, disclosed only if an inflow is probable.
Discounting at a post-tax rate or the entity's borrowing rate without adjustment.
The question gives one rate and students use it without checking the type.
Fix: Use a pre-tax rate reflecting the time value of money and liability-specific risks. If the question gives a post-tax rate, say that a pre-tax rate is required.
Deducting the expected profit on sale of an asset from the provision.
The sale seems related to the event that created the obligation.
Fix: Gains on expected disposal of assets are never considered in measuring a provision. Account for them under the relevant standard when they occur.
Treating the unwinding of discount as an operating expense, or forgetting it in later years.
Students stop after the initial present value entry.
Fix: Each year, add opening provision × discount rate to the provision and charge it as finance cost (borrowing cost).

Worked examples

Example 1

A company sells 10,000 machines with a one-year warranty. Past experience shows that 70% will need no repair, 20% will need minor repairs costing ₹2,000 each, and 10% will need major repairs costing ₹10,000 each. At the reporting date, all machines are under warranty. What provision should be made?

Show the solution

Many similar items are covered by one warranty, so use the expected value.
Expected cost per machine = (70% × ₹0) + (20% × ₹2,000) + (10% × ₹10,000).
= ₹0 + ₹400 + ₹1,000 = ₹1,400.
Total provision = 10,000 × ₹1,400 = ₹1,40,00,000.
Time value is not material because the warranty is for one year, so no discounting.

Answer: Recognise a warranty provision of ₹1,40,00,000. It is the expected value, not the most likely outcome of no repair.

Example 2

On 31 March 2027, a company must restore a leased site at the end of its useful life, three years later. The expected cost is ₹1,33,10,000. A suitable pre-tax discount rate is 10%. A third party has contractually agreed to reimburse ₹20,00,000 of the cost (an undiscounted amount receivable on the restoration date), and receipt is virtually certain once the company performs the restoration. The reimbursement relates to the same outflow and falls on the same date, so the reimbursement asset is measured consistently with the provision, at present value using the same 10% rate. Measure the provision and the reimbursement asset on 31 March 2027, and show the unwinding for the year ending 31 March 2028. Ignore the date-of-recognition debit side.

Show the solution

The time value of money is material, as the outflow is three years away, so discount.
PV of the provision = ₹1,33,10,000 ÷ (1.10)³ = ₹1,33,10,000 ÷ 1.331 = ₹1,00,00,000.
Reimbursement is virtually certain, so recognise a separate asset. It is measured consistently with the related provision. The receipt falls on the same date as the payment, so use the same rate: ₹20,00,000 ÷ 1.331 = ₹15,02,630 (rounded). It does not exceed the provision.
The balance sheet shows a provision of ₹1,00,00,000 as a liability and a reimbursement asset of ₹15,02,630. They are not netted off.
Unwinding of the provision for the year ending 31 March 2028 = ₹1,00,00,000 × 10% = ₹10,00,000, charged as finance cost.
Provision at 31 March 2028 = ₹1,10,00,000.
Unwinding of the reimbursement asset = ₹15,02,630 × 10% = ₹1,50,263 (rounded). It is recognised in profit or loss as finance income. The asset becomes ₹16,52,893 (rounded), which is still within the provision.

Answer: Provision at 31 March 2027 is ₹1,00,00,000, with a separate reimbursement asset of ₹15,02,630 (both discounted at 10%). For 2027-28, the finance cost on the provision is ₹10,00,000 and the closing provision is ₹1,10,00,000. The unwinding of the reimbursement asset, ₹1,50,263 (rounded), is recognised in profit or loss as finance income, and the closing asset is ₹16,52,893 (rounded).

Exam tips

Write the reason for your method in one line: 'large population, so expected value' or 'single obligation, so most likely outcome'. Examiners reward the reasoning.
In reimbursement questions, state the two tests separately: provision is probable outflow, reimbursement is virtually certain. Show both on the balance sheet.
If a question gives a post-tax discount rate or mentions an expected gain on sale of an asset, treat it as a trap and explain why it is excluded or adjusted.
Show the unwinding of discount for every later year in a discounting question. Present it as finance cost.
For MCQs, compute the expected value first and match it to the options. Check that probabilities total 100%.

Practice questions from Ind AS 37 Provisions, Contingent Liabilities and Contingent Assets

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 in Ind AS 37?

Use expected value when the provision covers a large population of similar items, such as warranties. Use the most likely outcome for a single obligation, such as one legal case. If other outcomes are mostly higher or lower than the most likely one, the best estimate may be higher or lower than it.

Which discount rate is used for provisions under Ind AS 37?

Use a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. The rate must not reflect risks already adjusted in the cash flow estimates. Discounting applies only where the time value of money is material.

How is a reimbursement shown against a provision?

Recognise the reimbursement 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 the statement of profit and loss, the expense may be presented net of the reimbursement.

Are gains from selling assets considered when measuring a provision?

No. Gains from the expected disposal of assets are not taken into account, even if the disposal is linked to the event that created the provision. They are accounted for under the relevant standard when they occur.