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

Ind AS 37 Scope and Key Definitions

Updated 10 October 2026 · Fact-checked

Ind AS 37 covers provisions, contingent liabilities and contingent assets, except where another Standard deals with the specific item. A provision is a liability of uncertain timing or amount. A contingent liability is a possible obligation, or a present obligation not recognised. Classify each item using these definitions first.

Understand Ind AS 37 Scope and Key Definitions

Ind AS 37 answers one question: when should a company record a liability that is uncertain, and when should it only disclose it? Everything starts with the definitions.

A liability is a present obligation arising from past events, whose settlement is expected to result in an outflow of resources embodying economic benefits. A provision is a liability of uncertain timing or amount. So a provision is a liability, not a separate thing. The difference from a normal payable (or accrual) is the degree of uncertainty. The Standard itself says all provisions are contingent in a general sense, but it uses the word 'contingent' only for items that are not recognised.

A present obligation comes from an obligating event: an event that creates a legal or constructive obligation, leaving the entity no realistic alternative to settling it. A legal obligation derives from a contract, legislation or other operation of law. A constructive obligation derives from the entity's own actions. Through an established pattern of past practice, published policies or a sufficiently specific current statement, the entity has indicated it will accept certain responsibilities, and so has created a valid expectation in other parties that it will discharge them.

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. A contingent asset is a possible asset whose existence will be confirmed only by such uncertain future events.

Scope: where another Standard deals with a specific type of provision, contingent liability or contingent asset, that Standard applies instead. Examples are Ind AS 12 (income taxes), Ind AS 116 (leases), Ind AS 19 (employee benefits), Ind AS 117 (insurance contracts), Ind AS 103 (contingent consideration in a business combination) and Ind AS 115 (revenue from contracts with customers). Two exceptions matter: Ind AS 37 applies to leases that become onerous before the commencement date, and to onerous contracts with customers, because Ind AS 115 has no rule for them. Also, 'provision' for depreciation, impairment and doubtful debts is an adjustment to an asset's carrying amount and is outside this Standard.

Key rules to remember

Provision: Provision = liability of uncertain timing or amount; Recognise only if all three recognition conditions are met.
Recognition conditions (paragraph 14): Present obligation (legal or constructive) from a past event + outflow probable + reliable estimate possible; All three must hold. If any one fails, no provision.
Liability (paragraph 10): Present obligation from past events + expected outflow of economic benefits; Settlement is expected to result in an outflow of resources.
Obligating event (paragraph 17): Event leaving no realistic alternative to settlement: enforceable by law, or creates valid expectations (constructive); The event must be in the past, not a future intention.
Contingent liability: (a) possible obligation, or (b) present obligation not recognised (outflow not probable, or amount not reliably measurable); It is not recognised as a liability.
Contingent asset: Possible asset confirmed only by uncertain future events not wholly within entity's control; It is a possible asset, not a confirmed one: its existence depends on events outside the entity's control.
Onerous contract: Unavoidable costs of meeting obligations > economic benefits expected; Covered in detail under onerous contracts.

How to solve Ind AS 37 Scope and Key Definitions questions

Use this sequence for any classification question on Ind AS 37 definitions and scope.

1Check scope. Is the item covered by another Standard such as Ind AS 12, 19, 115 or 116? If yes, apply that Standard. Also exclude depreciation, impairment and doubtful debts.
2Identify the past event. Has something already happened by the reporting date? A future plan or intention is not a past event.
3Decide if it is an obligating event. Does the law enforce settlement, or has the entity created a valid expectation through past practice, published policy or a specific statement?
4If there is a present obligation, test the other two conditions: is an outflow probable, and can a reliable estimate be made?
5If all three conditions are met, recognise a provision. If the obligation is present but one of the last two fails, it is a contingent liability.
6If the obligation is only possible (depends on uncertain future events outside your control), it is a contingent liability. If it is a possible inflow, it is a contingent asset.
7State the treatment in one line: recognise, disclose, or ignore, and name the paragraph or definition used.

Quickest way: Three-question filter

When to use it: For MCQs and short classification questions where time is tight.

Q1: Is there a present obligation from a past event? No means contingent liability (possible obligation) or nothing.
Q2: Is an outflow probable? No means contingent liability.
Q3: Can it be estimated reliably? No means contingent liability.
Three yeses mean provision. A possible asset whose existence depends on uncertain future events outside your control is a contingent asset.

Common mistakes in Ind AS 37 Scope and Key Definitions

Treating a provision and a liability as unrelated terms.
Students learn them as separate headings.
Fix: Remember a provision is a liability of uncertain timing or amount. The difference from a payable or accrual is uncertainty.
Creating a provision for a future intention, such as a planned repair, without a past event.
Students think any expected cost needs a provision.
Fix: Ask what past event creates the obligation. No obligating event means no provision.
Ignoring constructive obligations because no law requires payment.
Students equate obligation with legal duty.
Fix: If past practice, published policy or a specific statement created a valid expectation, a constructive obligation exists.
Calling every unrecognised item a 'possible' obligation.
The word contingent is used loosely.
Fix: A contingent liability can also be a present obligation that fails the probable-outflow or reliable-estimate test.
Applying Ind AS 37 to employee benefits, income tax or doubtful debts.
The word 'provision' appears in all of them.
Fix: Check scope first. Ind AS 19 and Ind AS 12 apply to those, and doubtful debts and depreciation are asset adjustments.
Treating a contingent asset as a confirmed asset because the gain looks very likely.
Students mirror the liability rules.
Fix: A contingent asset is only a possible asset. Its existence is confirmed only by uncertain future events not wholly within the entity's control.

Worked examples

Example 1

Rathi Textiles Ltd has a published policy of refunding the price of defective goods even though the law does not require it, and has done so every year. At the reporting date, goods sold earlier are expected to lead to refunds. Is there an obligation? Classify it.

Show the solution

Scope: product refunds are not covered by another Standard, so Ind AS 37 applies.
Past event: the sale of goods before the reporting date.
Legal obligation: none, as no law or contract requires the refund.
Constructive obligation: the established pattern of past practice and published policy has created a valid expectation in customers that the company will refund.
So there is a present obligation from a past event, which is an obligating event.
Whether to record a provision now depends on the other two conditions: probable outflow and reliable estimate.

Answer: A constructive obligation exists. It becomes a provision if an outflow is probable and a reliable estimate can be made; otherwise it is a contingent liability.

Example 2

Which of these is a contingent liability under Ind AS 37? (A) A customer has sued Meera Ltd for breach of contract over a supply made before the reporting date. Whether Meera is liable will be confirmed only by the court's decision. (B) Trade payables for goods received. (C) A provision for depreciation on plant. (D) Gratuity payable to employees.

Show the solution

Option B: trade payables are a present obligation with certain amount and timing, so a normal liability, not a contingent liability.
Option C: depreciation is an adjustment to the carrying amount of an asset and is outside this Standard.
Option D: employee benefits are dealt with by Ind AS 19, not Ind AS 37.
Option A: the supply took place before the reporting date, so there is a past event. Whether Meera has an obligation will be confirmed only by the court's decision, an uncertain future event not wholly within Meera's control. This is a possible obligation arising from a past event.

Answer: Option A is the contingent liability.

Exam tips

In MCQs, first look for scope exclusions: Ind AS 19, 12, 115, 116 and depreciation or doubtful debts usually signal the trap.
When asked to differentiate provision and contingent liability, write the three recognition conditions and say which one fails.
For constructive obligation answers, quote both parts: past practice, policy or specific statement, and valid expectation of others.
Always state the treatment at the end: recognise, disclose or no action, so you earn the conclusion mark.
Keep definitions close to the Standard's wording; examiners award marks for the key phrases such as 'not wholly within the control of the entity'.

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

Ind AS 37 Scope and Key Definitions: frequently asked questions

What is the difference between a provision and a contingent liability?

A provision is a recognised liability: there is a present obligation, an outflow is probable and a reliable estimate can be made. A contingent liability is not recognised because it is either a possible obligation or a present obligation that fails the probability or measurement test.

What is a constructive obligation in Ind AS 37?

It is an obligation arising from the entity's own actions. Through past practice, published policies or a specific current statement, the entity has shown it will accept certain responsibilities. This creates a valid expectation in other parties that it will discharge them.

Is a provision the same as a liability?

A provision is a type of liability, one of uncertain timing or amount. It is not a separate thing from a liability. Like any liability, it is a present obligation arising from past events.

Does Ind AS 37 apply to provision for doubtful debts and depreciation?

No. Those are adjustments to the carrying amounts of assets and are not addressed in this Standard.