Corporate Accounting and Auditing · Provisions, Contingent Liabilities and Contingent Assets (Ind AS 37)

Applying Ind AS 37: Illustrations and Disclosures

Updated 10 October 2026 · Fact-checked

Ind AS 37 applies one test to every case: is there a present obligation from a past event, is an outflow probable, and can you estimate it reliably? If yes, recognise a provision at the best estimate. If the outflow is only possible, disclose a contingent liability. Then give the required disclosures.

Understand Applying Ind As 37: Illustrations and Disclosures

Every Ind AS 37 question is the same test applied to a new story. Ask three things. Is there a present obligation (legal or constructive) that arose from a past obligating event? Is an outflow of resources probable (more likely than not)? Can the amount be reliably estimated? If all three are yes, you recognise a provision. If the obligation is only possible, or the outflow is not probable, or no reliable estimate is possible, you disclose a contingent liability unless the outflow is remote.

The skill is spotting the obligating event. For a warranty, the event is the sale of the product with the warranty. The provision is for the expected cost across the whole population of sales, not for one item. For a legal claim, the event is the incident, and you use the legal adviser's view on whether the entity will probably lose. For decommissioning or environmental restoration, the event is the installation or the damage caused. You recognise the cost of damage already done, not costs of future operations.

For a decommissioning obligation, the provision is the present value of the expected future cost, using a pre-tax discount rate that reflects current market assessments of the time value of money and risks specific to the liability. The matching debit goes to the cost of the asset (under Ind AS 16), not to profit or loss. Each year the discount unwinds, and the unwinding is charged as a finance cost.

For a refund policy, a published policy or past practice of refunding creates a constructive obligation, so you provide for the expected refunds on goods sold. A contingent asset is never recognised. You disclose it only when an inflow is probable. If the inflow is virtually certain, it is no longer contingent and is recognised as an asset.

Disclosure is the second half of the marks. For each class of provision you give the opening balance, additions, amounts used, unused amounts reversed, the unwinding of discount, and the closing balance. You also describe the nature, the timing and uncertainties, and any expected reimbursement.

Key rules to remember

Recognition test: Present obligation from past event + outflow probable + reliable estimate = Provision; If any one fails, do not recognise. Disclose a contingent liability unless outflow is remote.
Expected value (large population): Provision = Σ (Probability × Cost of outcome); Use for warranties and refunds where many similar items exist.
Single obligation: Provision = Most likely outcome; Use for one legal case. Adjust upward or downward if other outcomes are mostly higher or lower.
Present value of decommissioning cost: PV = Expected future cost ÷ (1 + r)^n; r is the pre-tax discount rate; n is the number of years to settlement.
Unwinding of discount: Finance cost = Opening provision × r; Charge to profit or loss each year. It increases the provision.
Provision movement note: Closing = Opening + Additions + Unwinding − Utilised − Unused reversed; Required for each class of provision.
Contingent items: Contingent liability: disclose unless remote. Contingent asset: disclose only if inflow probable.; Neither is recognised in the balance sheet.

How to solve Applying Ind As 37: Illustrations and Disclosures questions

Use this order for any warranty, claim, restoration or refund question.

1Identify the obligating event and its date. Check it happened on or before the reporting date.
2Decide whether the obligation is legal or constructive. Ignore future operating costs and intentions with no commitment.
3Judge probability of outflow: probable means more likely than not.
4Choose the measure: expected value for large populations, most likely outcome for a single case.
5If the effect of time value is material, discount at a pre-tax rate and show the present value.
6Pass the journal entry. Debit expense, or the asset cost for decommissioning. Credit provision.
7Treat reimbursements as a separate asset only when virtually certain. Do not net them in the provision.
8Write the disclosure: movement table, nature, timing, uncertainties, and contingent liability or asset notes.

Quickest way: Three-question filter then number

When to use it: Use in the 14-mark written question and for MCQs when time is short.

Ask: obligation now, outflow probable, estimate reliable? Write yes or no for each.
All yes: compute the amount. Expected value for many items, most likely for one.
Otherwise: contingent liability note if not remote, nothing if remote.
For decommissioning, compute PV, capitalise it, and show unwinding each year.
Close with the one-line disclosure you would give.

Common mistakes in Applying Ind As 37: Illustrations and Disclosures

Providing for future operating losses or planned repairs.
Students feel a future cost is certain, so it must be provided.
Fix: Check for a present obligation. No past event means no provision, however certain the future cost.
Debiting decommissioning cost to profit or loss.
Students treat every provision as an expense.
Fix: Capitalise the initial present value into the asset's cost. Only the unwinding goes to finance cost.
Recognising a contingent asset because a claim looks strong.
Students apply prudence in reverse.
Fix: Recognise only when inflow is virtually certain. If merely probable, disclose it.
Netting an insurance recovery against the provision.
It looks simpler and gives the same net profit.
Fix: Show the provision in full and a separate reimbursement asset when recovery is virtually certain.
Using a single outcome for a warranty on thousands of units.
Students pick the most likely case from habit.
Fix: Use expected value across the population of sales.
Skipping the movement table in disclosures.
Students stop once the journal entry is done.
Fix: Always show opening, additions, utilised, reversed, unwinding and closing for each class.

Worked examples

Example 1

Sunrise Appliances Ltd sold 10,000 units during the year with a one-year warranty. Past experience: 80% of units will have no defects, 15% will have minor defects costing ₹400 each to repair, and 5% will have major defects costing ₹2,000 each. Calculate the warranty provision and state the journal entry.

Show the solution

Obligating event: sale of units with warranty. Outflow is probable across the population, and it can be estimated.
No defects: 8,000 units × ₹0 = ₹0.
Minor defects: 10,000 × 15% = 1,500 units × ₹400 = ₹6,00,000.
Major defects: 10,000 × 5% = 500 units × ₹2,000 = ₹10,00,000.
Expected cost = ₹6,00,000 + ₹10,00,000 = ₹16,00,000.
Journal: Warranty expense A/c Dr ₹16,00,000 to Provision for warranties A/c ₹16,00,000.
Disclose the movement, the nature of the warranty and the uncertainty about the amount and timing of repairs.

Answer: Warranty provision = ₹16,00,000, recognised by debiting warranty expense and crediting provision for warranties, with movement and nature disclosed.

Example 2

Bharat Oil Ltd installed an oil platform on 1 April 2026. It must remove the platform and restore the site after 5 years at an expected cost of ₹2,00,00,000. The pre-tax discount rate is 10%. The present value factor for 5 years at 10% is 0.621. Show the initial recognition and the finance cost for the year ended 31 March 2027.

Show the solution

Obligating event: installation of the platform creates a present legal obligation. Outflow is probable and estimable.
Present value = ₹2,00,00,000 × 0.621 = ₹1,24,20,000.
Initial entry: Platform (cost of asset) A/c Dr ₹1,24,20,000 to Decommissioning provision A/c ₹1,24,20,000.
Unwinding for year 1 = ₹1,24,20,000 × 10% = ₹12,42,000.
Entry: Finance cost A/c Dr ₹12,42,000 to Decommissioning provision A/c ₹12,42,000.
Closing provision at 31 March 2027 = ₹1,24,20,000 + ₹12,42,000 = ₹1,36,62,000.
Disclose opening nil, addition ₹1,24,20,000, unwinding ₹12,42,000, closing ₹1,36,62,000, plus the timing (about 5 years) and the uncertainty over the final cost and the discount rate.

Answer: Initial provision ₹1,24,20,000 capitalised into the platform. Finance cost for year 1 is ₹12,42,000 and the closing provision is ₹1,36,62,000.

Exam tips

Always start the written answer with the three-test conclusion. Examiners award marks for the reasoning, not only the figure.
Show each probability times cost line in warranty problems. A wrong total still earns step marks.
In decommissioning questions, capitalise the present value and charge only the unwinding to profit or loss.
Write the movement table in full even if some columns are nil. It is a standard mark-earning item.
In MCQs, check whether the question says probable, possible or virtually certain. The answer often turns on that word.

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

Applying Ind As 37: Illustrations and Disclosures: frequently asked questions

How do I treat a legal claim against the company under Ind AS 37?

Check if the event occurred before the reporting date and if the legal adviser thinks the company will probably lose. If yes and the amount is estimable, recognise a provision at the best estimate. If the loss is only possible, disclose a contingent liability. If it is remote, nothing is needed.

Is the decommissioning provision charged to profit or loss?

No, not at the start. The present value of the expected cost is added to the cost of the related asset, and it is then depreciated. Each year the unwinding of the discount is charged as a finance cost.

What disclosures does Ind AS 37 require for provisions?

For each class you give the opening balance, additions, amounts used, unused amounts reversed, the unwinding of discount and the closing balance. You also describe the nature of the obligation, the expected timing of outflows, the uncertainties and any expected reimbursement.

When is a contingent asset recognised?

Only when the inflow is virtually certain, since it is then no longer contingent. If the inflow is merely probable, you disclose it in the notes. Otherwise you say nothing.