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

Objective, Scope and Definitions under Ind AS 37

Updated 5 October 2026 · Fact-checked

Ind AS 37 sets when an entity recognises provisions, contingent liabilities and contingent assets, and what it must disclose. A provision is a liability of uncertain timing or amount. To solve questions, find the obligating event, check for a present legal or constructive obligation, then test outflow probability and reliable estimate.

Understand Objective, Scope and Definitions under Ind AS 37

Start with the problem Ind AS 37 solves. Entities can face uncertain future payments: lawsuits, warranties, restructuring, clean-up costs. Without a rule, they could hide losses or create "cookie jar" reserves to smooth profit. Ind AS 37 makes sure a liability is recognised only when it truly exists, and that enough information is disclosed otherwise.

The objective is to ensure that appropriate recognition criteria and measurement bases are applied to provisions, contingent liabilities and contingent assets, and that sufficient information is disclosed in the notes so users can understand their nature, timing and amount.

Scope: the Standard applies to all provisions, contingent liabilities and contingent assets, except those resulting from executory contracts (other than onerous contracts) and those within the scope of another Standard. For example, income taxes (Ind AS 12), employee benefits (Ind AS 19), insurance contracts (Ind AS 104) and revenue from contracts with customers (Ind AS 115) have their own Standards. Ind AS 37 also does not apply to financial instruments (including guarantees) that are within the scope of Ind AS 109. For Ind AS 115, note the exception: Ind AS 37 applies to onerous contracts with customers, except where Ind AS 115 specifies otherwise. Where another Standard deals with a specific type of provision, apply that Standard.

Two points need care. First, leases: Ind AS 116 governs leases, including a lessee's lease liability for a right-of-use asset and lessor accounting, so you do not use Ind AS 37 for those. Ind AS 37 applies only in limited cases. It applies to short-term leases and leases of low-value assets that have become onerous, and to leases that become onerous before the lease commences. Second, insurers: Ind AS 37 applies to an insurer's provisions, contingent liabilities and contingent assets, other than those arising from its insurance contracts.

Also note what is not covered. Depreciation, impairment and doubtful debts are adjustments to the carrying amount of assets. They are not liabilities, so Ind AS 37 does not deal with them.

Now the key definitions. A liability is a present obligation arising from past events, the settlement of which is expected to result in an outflow of resources embodying economic benefits. A provision is a liability of uncertain timing or amount. That uncertainty is what separates it from a trade payable or an accrual, where timing and amount are largely certain. An obligating event is an event that creates a legal or constructive obligation, leaving the entity no realistic alternative to settling it. A legal obligation comes from a contract, legislation or other operation of law. A constructive obligation comes from the entity's own actions: an established pattern of past practice, published policies or a sufficiently specific current statement has created a valid expectation in others that it will discharge the responsibility.

Finally, the link between provisions and contingent items. A contingent liability is either (a) a possible obligation whose existence will be confirmed only by uncertain future events not wholly within the entity's control, or (b) a present obligation that is not recognised because an outflow is not probable or the amount cannot be measured reliably. Do not treat (b) on the measurement ground as a routine path. A reliable estimate can almost always be made, so a present obligation that cannot be measured reliably arises only in extremely rare cases. A contingent asset is a possible asset arising from past events whose existence will be confirmed only by uncertain future events not wholly within the entity's control. A provision is recognised in the books; a contingent liability is only disclosed (unless the outflow is remote); a contingent asset is disclosed only when an inflow is probable and is not recognised.

Key rules to remember

Provision: Provision = Liability of uncertain timing or amount; Uncertainty is about when or how much, not about whether the obligation exists. If existence itself is uncertain, think contingent liability.
Liability test: Present obligation + Past event + Expected outflow of economic benefits; All three parts are needed for a liability.
Recognition conditions for a provision: Present obligation (legal or constructive) from a past event AND outflow probable AND reliable estimate possible; All three must be met. If any fails, no provision. Probable means more likely than not. A reliable estimate can almost always be made.
Obligating event: Obligating event = event creating a legal or constructive obligation with no realistic alternative to settlement; The obligation must exist independent of the entity's future actions. Future operating costs are not provisions.
Contingent liability treatment: Possible obligation, or present obligation failing the probability test (or, in extremely rare cases, the measurement test) → disclose, unless outflow is remote; Not recognised in the balance sheet. Inability to make a reliable estimate of a present obligation arises only in extremely rare cases.
Contingent asset treatment: Do not recognise; disclose only if inflow is probable; If realisation is virtually certain, it is no longer a contingent asset and is recognised as an asset.
Scope exclusions: Ind AS 37 applies to all provisions, contingent liabilities and contingent assets, except those from executory contracts (other than onerous contracts) and those within the scope of another Standard; Examples of other Standards: Ind AS 12, Ind AS 19, Ind AS 104 (insurance contracts), Ind AS 115 and Ind AS 109 (Ind AS 37 does not apply to financial instruments, including guarantees, within Ind AS 109). Ind AS 37 does apply to onerous contracts with customers, except where Ind AS 115 specifies otherwise. Ind AS 116 governs leases, including the lessee's lease liability and lessor accounting, but Ind AS 37 still applies to leases that become onerous before commencement and to short-term or low-value leases that become onerous.

How to solve Objective, Scope and Definitions under Ind AS 37 questions

Use this sequence for any scenario on scope, definitions or the provision versus contingent liability decision.

1Check scope first. Is the item covered by another Ind AS (tax, leases, employee benefits, revenue, financial instruments)? If so, apply that Standard. Also check whether it is an executory contract that is not onerous. An onerous contract with a customer is still dealt with under Ind AS 37, unless Ind AS 115 specifies otherwise.
2Identify the past event. Ask: what has already happened by the reporting date? Future intentions or planned costs are not past events.
3Decide if it is an obligating event. Does it create a legal obligation (contract, law) or a constructive one (past practice, published policy, specific announcement creating valid expectation)? Is there no realistic alternative to settlement?
4Decide whether the obligation is present. If it is more likely than not that a present obligation exists at the reporting date, treat it as present. If it is more likely that none exists, it is a possible obligation.
5Test the outflow. Is an outflow of resources probable (more likely than not)? Is a reliable estimate possible? A reliable estimate can almost always be made. If both are yes, recognise a provision.
6If the tests fail, classify. Possible obligation, or present obligation not meeting the probability test, is a contingent liability: disclose unless the outflow is remote. A present obligation that cannot be measured reliably is also a contingent liability, but this arises only in extremely rare cases.
7Treat any inflow separately. Do not recognise contingent assets. Disclose if inflow is probable; recognise only if virtually certain. If the inflow is a reimbursement of expenditure needed to settle a provision, recognise it as a separate asset only when virtually certain.
8Write the conclusion in provision, facts, conclusion form: state the rule, apply it to the facts, and conclude with the accounting treatment.

Quickest way: Three-gate filter

When to use it: Use in MCQs and short-answer questions where you have about a minute and need the treatment quickly.

Gate 1: Obligation at reporting date from a past event (legal or constructive)? If no, no provision. Possible obligation means contingent liability.
Gate 2: Outflow probable? If no, contingent liability; disclose unless remote.
Gate 3: Reliable estimate? Almost always yes. Only in extremely rare cases is it not possible, and then the present obligation is a contingent liability; disclose. If all three gates pass, provide.
Inflow cases: provide nothing; disclose only if probable; recognise as an asset only if virtually certain.

Common mistakes in Objective, Scope and Definitions under Ind AS 37

Treating a future operating loss or planned expenditure as a provision.
Students see a certain future cost and assume a liability exists.
Fix: Check for a past obligating event. Without a present obligation at the reporting date, there is no provision, however certain the future cost.
Saying a provision is a liability whose amount is certain, or confusing it with an accrual.
The words provision and accrual are used loosely in everyday accounting.
Fix: A provision has uncertain timing or amount. Accruals and trade payables are for goods or services received and invoiced or agreed, with little uncertainty.
Treating every constructive obligation as a board intention.
Students overlook the need for a valid expectation created in others.
Fix: A constructive obligation needs an established pattern of practice, published policy or sufficiently specific statement, and the other party must expect the entity to act. An undisclosed internal plan is not enough.
Recognising a contingent liability in the books or ignoring disclosure.
Students assume probable and possible are the same.
Fix: Contingent liabilities are not recognised. Disclose them unless the outflow is remote. Recognise only when the obligation is present, probable and measurable.
Recognising a contingent asset when a favourable outcome seems likely.
Students treat the rule as symmetric with liabilities.
Fix: Contingent assets are never recognised. Disclose if inflow is probable. Recognise the asset only when realisation is virtually certain.
Applying Ind AS 37 to items that have their own Standard, such as income tax or employee benefits.
Students jump to the topic of the chapter without checking scope.
Fix: Always start with the scope check and name the specific Ind AS that applies instead.

Worked examples

Example 1

Case: Kavya Chemicals Ltd operates a plant in a state where the law does not require site clean-up after an accidental chemical leak. For several years the company has published an environmental policy stating that it will clean up any contamination it causes, and it has always done so. On 31 March 20X2, a leak has contaminated land near the plant. The clean-up cost can be estimated reliably, and the company will have to pay it. Identify the nature of the obligation and state the treatment.

Show the solution

Scope: this is not an executory contract, and no other Ind AS covers environmental clean-up obligations of this kind. Ind AS 37 applies.
Past event: the leak that contaminated the land happened before the reporting date. This is the obligating event.
Legal or constructive: no law or contract requires the clean-up, so there is no legal obligation.
The published policy and the consistent past practice create a valid expectation among the public that the company will clean up. This is a constructive obligation, and the company has no realistic alternative to settling it.
The obligation is present at the reporting date. The outflow is probable and the cost can be estimated reliably, so all three recognition conditions are met.

Answer: The obligation is constructive, arising from the published policy and past practice. The leak is the obligating event. A provision is recognised for the estimated clean-up cost and the required disclsecurities are made.

Example 2

Case: Dhruv Infra Ltd is defending a damages claim filed by a vendor. At the reporting date, its lawyers advise that it is more likely than not that the company will lose and the amount can be estimated reliably. Separately, a second claim is filed by a customer; lawyers advise that the company will probably win, but the possibility of loss is not remote. The company's insurance policy covers damages payable on the vendor claim. It has claimed reimbursement from the insurer, and its lawyers say recovery is probable but not virtually certain. Decide the treatment of each item.

Show the solution

First claim: the lawsuit arises from a past event. Lawyers say it is more likely than not that a present obligation exists and outflow is probable. A reliable estimate is possible. All three conditions are met.
Treatment of the first claim: recognise a provision. Disclose the nature of the obligation, the movement in the carrying amount during the year, the expected timing of the outflow and the main uncertainties.
Second claim: it is more likely that no present obligation exists, so this is a possible obligation. Outflow is not remote.
Treatment of the second claim: contingent liability, not recognised; disclose its nature and an estimate of the financial effect where practicable.
Insurer claim: it relates to the vendor claim, so it is a reimbursement of expenditure required to settle the provision. A reimbursement is recognised as a separate asset only when it is virtually certain. Here recovery is only probable, so it is not recognised.
Treatment of the insurer claim: it is a contingent asset. Do not recognise it; disclose briefly as inflow is probable. If recovery later becomes virtually certain, recognise a separate asset, not exceeding the provision. The provision itself stays at the full amount and is not reduced by the expected recovery.

Answer: Vendor claim: provision recognised at the full estimated amount, with disclosures. Customer claim: contingent liability, disclosed only. Insurer reimbursement: contingent asset, not recognised and disclosed because inflow is probable; recognised as a separate asset only if it becomes virtually certain.

Exam tips

Begin every case answer with a scope check and one line on the obligating event. Examiners award marks for this reasoning.
Learn the exact definitions of provision, contingent liability and contingent asset word for word in simple form. Definition questions are easy marks.
In legal obligation versus constructive obligation questions, give a one-line source for each (contract or law versus past practice or published policy creating valid expectation) and one example.
In MCQ cases, watch the words probable, possible and remote. Probable means more likely than not, and remote means very unlikely.
Write conclusions as a short table-free list: item, classification, accounting treatment. Do not stop at the classification.

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

Objective, Scope and Definitions under Ind AS 37: frequently asked questions

What is the difference between a provision and a contingent liability under Ind AS 37?

A provision is a recognised liability of uncertain timing or amount, where a present obligation exists, outflow is probable and the amount can be estimated reliably. A contingent liability is not recognised. It is either a possible obligation or a present obligation that fails the probability test. In extremely rare cases, a present obligation that cannot be measured reliably is also a contingent liability. It is disclosed unless the outflow is remote.

What is the difference between a legal obligation and a constructive obligation?

A legal obligation arises from a contract, legislation or other operation of law. A constructive obligation arises from the entity's own conduct, such as established practice or published policy, which creates a valid expectation in others. Both count as present obligations for recognising a provision.

What is an obligating event in Ind AS 37?

It is an event that creates a legal or constructive obligation, so the entity has no realistic alternative to settling it. For example, a leak that contaminates land, where the entity has a policy of cleaning up, creates an obligation to clean up. A mere intention to spend money in future is not an obligating event.

Does Ind AS 37 apply to all provisions?

It applies to all provisions, contingent liabilities and contingent assets, except those resulting from executory contracts (other than onerous contracts) and those within the scope of another Standard, such as income taxes, employee benefits, insurance contracts (Ind AS 104) and financial instruments, including guarantees, within Ind AS 109. For revenue contracts, Ind AS 37 still applies to onerous contracts with customers, except where Ind AS 115 specifies otherwise. Leases are covered by Ind AS 116, but Ind AS 37 still applies to leases that become onerous before commencement and to short-term or low-value leases that become onerous. Check scope first in every question.