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

Recognition Criteria for Provisions under Ind AS 37

Updated 5 October 2026 · Fact-checked

Under Ind AS 37, you recognise a provision only when three conditions are met: the entity has a present obligation (legal or constructive) from a past event, an outflow of resources is probable (more likely than not), and the amount can be reliably estimated. If any condition fails, you do not recognise a provision. You may disclose a contingent liability instead.

Understand Recognition Criteria for Provisions

A provision is a liability of uncertain timing or amount. It is not a payable or an accrual, where the amount and timing are largely certain. Ind AS 37 tells you when such an uncertain liability is booked in the balance sheet.

There are three conditions, and all must be met. First, the entity has a present obligation as a result of a past event. Second, it is probable that an outflow of resources embodying economic benefits will be required to settle it. Third, a reliable estimate of the amount can be made.

The obligation can be legal (from a contract, law or other operation of law) or constructive. A constructive obligation arises when the entity's established pattern of past practice, published policies or a sufficiently specific current statement has created a valid expectation in other parties that it will accept certain responsibilities. The entity must have no realistic alternative to settling.

The past event must be an obligating event. This is an event that leaves the entity no realistic alternative to settling the obligation. That is the case when settlement can be enforced by law, or, for a constructive obligation, when the event creates a valid expectation in others. Only obligations that exist independently of the entity's future actions qualify. An intention or a need to spend money in future is not enough. For example, a need to replace a machine in future, or to carry out planned repairs, is not a present obligation, because the entity can avoid the spending by changing its plans.

Probable in Ind AS 37 means more likely than not, that is, the probability is greater than 50%. If it is less likely than not, no provision is made. Where there are many similar obligations, such as warranties, you judge probability across the class as a whole. The outflow may be probable for the class even if it is unlikely for any one item. Reliable estimates are almost always possible. Only in extremely rare cases can no reliable estimate be made. Then the item is a contingent liability and is disclosed, not recognised.

For a legal dispute, the entity decides whether a present obligation exists by considering all available evidence, including the opinion of experts. If it is more likely than not that a present obligation exists at the end of the reporting period, the entity treats it as existing.

Key rules to remember

Recognition test for a provision: Present obligation from a past event AND probable outflow AND reliable estimate → recognise provision; All three conditions must be met. If any one fails, no provision is recognised.
Meaning of probable: Probable = more likely than not = probability > 50%; For many similar items, assess the class as a whole, not each item alone.
Present obligation, where in doubt: Present obligation exists if it is more likely than not that it exists at the end of the reporting period; Used for disputes and lawsuits, after considering all available evidence.
Obligating event: Obligating event = event leaving no realistic alternative to settling the obligation; Legal: settlement is enforceable by law. Constructive: event creates a valid expectation in others.
If recognition criteria are not met: Possible obligation, or present obligation without probable outflow or reliable estimate → contingent liability (disclose, unless outflow is remote); A contingent liability is not recognised in the balance sheet.

How to solve Recognition Criteria for Provisions questions

Use this sequence for any question that asks whether a provision should be recognised.

1Identify the event in the case and check its date against the end of the reporting period. The obligation must exist at that date.
2Ask whether it is an obligating event. Check for a legal obligation (law, contract) or a constructive one (past practice, published policy or specific announcement creating a valid expectation).
3Apply the no realistic alternative test. If the entity can avoid the spending by its future actions, there is no present obligation.
4Judge the outflow. Is it more likely than not (above 50%)? For many similar items, judge across the class.
5Check whether a reliable estimate can be made. Remember that this is almost always possible.
6Conclude. If all three tests are met, recognise a provision at the best estimate. Otherwise, treat the item as a contingent liability and disclose it unless the outflow is remote.
7Write the answer in the form: provision, facts, conclusion.

Quickest way: Three-gate check

When to use it: Use it for short MCQs and for 3 to 5 mark written questions where you must decide quickly.

Gate 1: Is there a present obligation at the reporting date from a past event? If it depends on future plans, stop. No provision.
Gate 2: Is the outflow probable, meaning above 50%? If not, no provision; treat as a contingent liability and disclose unless the outflow is remote.
Gate 3: Can you estimate the amount reliably? If yes, recognise. In your written answer, name each gate and the case fact that decides it.
Look for the trap words: 'intends', 'plans', 'board decided', 'announced to affected parties', 'legal opinion', 'probable', 'possible'.

Common mistakes in Recognition Criteria for Provisions

Treating a future intention or need to spend as a present obligation, for example a provision for planned major repairs.
Students think a cost that will certainly be incurred must be provided for.
Fix: Apply the no realistic alternative test. If future action can avoid the spending, there is no present obligation, so no provision.
Reading 'probable' as 'possible' or as 'certain'.
In everyday language the word is loose.
Fix: Under Ind AS 37, probable means more likely than not, above 50%. Possible but not probable means a contingent liability.
Ignoring constructive obligations and looking only at the law or contract.
Students focus on legal enforceability.
Fix: Check past practice, published policies and specific statements that created a valid expectation in others. These can create an obligation without any law.
Assessing the probability of an outflow for each warranty claim separately.
Students apply the test item by item.
Fix: For a class of similar obligations, assess the likelihood of outflow across the class. A provision can arise even if each single claim is unlikely.
Saying no provision is possible because the amount is uncertain.
Students confuse provision with certain liability.
Fix: Uncertainty in amount is what makes it a provision. Use a best estimate. Only in extremely rare cases is a reliable estimate not possible.
Testing the obligation at the date of signing the accounts rather than the end of the reporting period.
Students mix this topic with events after the reporting period.
Fix: The obligating event must occur on or before the reporting date. Later events are handled under Ind AS 10.

Worked examples

Example 1

Case: At 31 March 2027, Zenith Ltd had sold goods with a one-year warranty covering repair of manufacturing defects. Based on past experience, it is more likely than not that some claims will arise from the goods sold. The estimate of repair cost can be made reliably from past data. Should Zenith recognise a provision at 31 March 2027?

Show the solution

Present obligation from a past event: the sale of goods with warranty is the obligating event. The warranty is a legal obligation under the contract of sale, and it exists at 31 March 2027.
Probable outflow: for warranties, probability is judged across the whole class of similar sales. Past experience shows that some claims are more likely than not, so the outflow is probable for the class, even though any single item is unlikely to be claimed.
Reliable estimate: the cost can be estimated reliably from past data.
All three conditions are met, so a provision is required.

Answer: Zenith Ltd should recognise a provision for warranty at 31 March 2027, at the best estimate of the expected repair cost on goods sold up to that date.

Example 2

Case: Brisk Ltd runs a factory. For a plant, the law requires fitting smoke filters by 30 September 2027. At 31 March 2027, the filters have not been fitted. Separately, the plant needs a major overhaul every four years, and the next one is planned for 2028. Should Brisk recognise provisions for (a) the cost of the filters and (b) the overhaul at 31 March 2027?

Show the solution

(a) Filters: the law requires fitting filters, but there is no present obligation to fit them at 31 March 2027. The cost can be avoided by future action, such as changing the operations, for example by closing the plant. No obligating event has occurred, so no provision is recognised for the filters. The deadline of 30 September 2027 is after the reporting date, and no non-compliance has occurred at 31 March 2027. A provision for a penalty would arise only if non-compliance occurred and all three recognition criteria were met, including a probable outflow and a reliable estimate of the penalty.
(b) Overhaul: no legal or constructive obligation to carry out the overhaul exists at 31 March 2027. The overhaul is a future expense that Brisk can avoid by future action, for example by selling or closing the plant. There is no present obligation from a past event, so no provision. When the overhaul is actually carried out, its cost is capitalised as a component under Ind AS 16, not dealt with under Ind AS 37.
Both fail the first test, so the other two tests need not be examined.

Answer: Brisk Ltd should not recognise a provision for either (a) the filters or (b) the overhaul at 31 March 2027, because neither is a present obligation arising from a past event.

Exam tips

Write the three conditions by name and tie each to a fact in the case. Marks are given for the application, not only the rule.
In MCQs, look for the word 'intends' or 'plans'. It often signals that the first condition fails.
If the answer is 'no provision', state what applies instead: contingent liability disclosure unless the outflow is remote, or no disclosure at all.
Always test the date of the obligating event against the end of the reporting period.
For constructive obligations, quote the fact that created the valid expectation, such as a published policy or a public announcement.

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

Recognition Criteria for Provisions in other exams

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

Recognition Criteria for Provisions: frequently asked questions

What are the recognition criteria for a provision under Ind AS 37?

There are three: a present obligation, legal or constructive, from a past event; a probable outflow of resources; and a reliable estimate of the amount. All three must be met. If any one fails, no provision is recognised.

What does probable mean in Ind AS 37?

It means more likely than not, that is, the probability is more than 50%. A chance that is only possible, but not probable, gives rise to a contingent liability. For many similar items, you judge the probability across the class.

What is the no realistic alternative test?

An obligating event is one that leaves the entity with no realistic alternative to settling the obligation. If the entity can avoid the spending by its future actions, there is no present obligation. So a planned expense does not need a provision.

What is a constructive obligation?

It arises from the entity's established pattern of past practice, published policies or a specific current statement. These create a valid expectation in others that the entity will accept certain responsibilities. The entity has no realistic alternative to meeting them.

Can a provision be recognised if the amount is uncertain?

Yes. A provision is by nature uncertain in timing or amount, so you use the best estimate. Only in extremely rare cases can no reliable estimate be made, and then the item is a contingent liability.