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

Measurement of Provisions under Ind AS 37

Updated 10 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 large populations of items, the most likely outcome for a single obligation, and discount to present value when the time value of money is material.

Understand Measurement of Provisions

Once you have decided that a provision must be recognised, the next question is: how much? Ind AS 37 answers with one phrase: best estimate. This is the amount the entity would rationally pay to settle the obligation at the end of the reporting period, or to transfer it to a third party at that time.

How you reach the best estimate depends on the situation. Where you have a large population of similar items, such as warranty claims on thousands of units, you use expected value. You weigh each possible outcome by its probability and add them up. Where there is a single obligation, such as one lawsuit, the individual most likely outcome is usually the best estimate. But if other outcomes are mostly higher or mostly lower, the best estimate can be a higher or lower amount. Where there is a continuous range and every point is equally likely, use the mid-point of the range.

You must also take account of risks and uncertainties. These call for care in judgement, so that income or assets are not overstated and expenses or liabilities are not understated. But uncertainty does not justify excessive provisions or deliberate overstatement of liabilities.

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. The rate must not reflect risks already adjusted in the cash flow estimates. The unwinding of the discount each year is shown as a borrowing cost (finance cost), not as an operating expense.

Finally, future events that may affect the amount should be reflected if there is sufficient objective evidence that they will occur, for example expected new technology that lowers a clean-up cost. Expected gains from disposal of assets are not taken into account when measuring a provision, even if the disposal is closely linked to the event giving rise to the provision.

Key rules to remember

Expected value: Expected value = Σ (Probability × Outcome amount); Used for a large population of items. Probabilities must add up to 100%.
Present value of a provision: PV = Expected future outflow ÷ (1 + r)ⁿ; r = pre-tax discount rate, n = number of years until settlement. Use only when the time value is material.
Unwinding of discount: Finance cost for the year = Opening provision × r; Added to the provision each year and charged to profit or loss as a borrowing cost.
Continuous range: Best estimate = (Lower limit + Upper limit) ÷ 2; Only when each point in the range is equally likely.
Single obligation: Best estimate = Most likely outcome; Adjust upward or downward if other possible outcomes are mostly higher or lower.
Asset disposal gains: Expected gains on disposal are ignored in measuring the provision; Recognise such gains only under the relevant Ind AS for that asset.

How to solve Measurement of Provisions questions

Use this order for any measurement question on Ind AS 37.

1Confirm the provision is recognised: present obligation, probable outflow and reliable estimate. If not, do not measure it.
2Identify the type of case: a large population of items (use expected value) or a single obligation (use the most likely outcome).
3Compute the best estimate. For expected value, multiply each outcome by its probability and add. Show each line.
4Adjust for future events only if there is sufficient objective evidence. Ignore expected gains on asset disposals.
5Check whether the time value is material. If so, discount the expected outflow using the pre-tax rate for the number of years given.
6Pass the entry: Dr Profit and Loss (or the asset cost if the standard so requires), Cr Provision. State the amount clearly.
7If asked for later years, compute the unwinding of discount as opening balance × rate and show the revised closing provision.
8Write a one-line conclusion naming the method and the amount.

Quickest way: Three-check shortcut for measurement problems

When to use it: When time is short and the question gives probabilities, a range, or a discount rate.

Read the data and tag it: probabilities means expected value; single case means most likely; range with equal chance means mid-point.
Compute the undiscounted figure first and box it.
If a rate and years are given, divide by (1 + r)ⁿ using the factor in the question. Never use a rate not given.
Cross-check that gains on asset sale and unlikely events with no evidence are excluded.
For the next year, add the unwinding: opening × r.

Common mistakes in Measurement of Provisions

Using the most likely outcome for a large population of items such as warranties.
Students pick the highest probability instead of weighting all outcomes.
Fix: For a large population, always compute expected value across all outcomes.
Adding expected profit on sale of an asset to reduce the provision.
It seems logical to net the gain against the cost.
Fix: Ind AS 37 ignores expected disposal gains in measuring a provision. Recognise them separately when realised under the relevant standard.
Discounting when the effect is not material, or not discounting when it is.
Students apply discounting by habit.
Fix: Discount only when the time value is material, or when the question gives a rate and settlement period.
Charging the unwinding of discount to operating expenses.
It is treated like the original provision.
Fix: Show unwinding as a finance (borrowing) cost in the Statement of Profit and Loss.
Overstating the provision to be safe.
Students confuse prudence with deliberate overstatement.
Fix: Take care in judgement, but do not create excess provisions or exaggerate liabilities.
Multiplying the discount factor by a year count instead of compounding.
Mistaking simple discount for present value.
Fix: Use PV = amount ÷ (1 + r)ⁿ, compounding over the full period.

Worked examples

Example 1

Sharma Appliances Ltd sells 10,000 geysers with a one-year warranty. Based on experience, 70% of units will have no defects, 20% will have minor defects costing ₹500 per unit to repair, and 10% will have major defects costing ₹2,000 per unit. Compute the warranty provision at the year-end.

Show the solution

This is a large population of similar items, so use expected value.
No defects: 70% × 10,000 = 7,000 units × ₹0 = ₹0.
Minor defects: 20% × 10,000 = 2,000 units × ₹500 = ₹10,00,000.
Major defects: 10% × 10,000 = 1,000 units × ₹2,000 = ₹20,00,000.
Total expected cost = ₹0 + ₹10,00,000 + ₹20,00,000 = ₹30,00,000.
Time value is not material for a one-year warranty, so no discounting.
Entry: Warranty Expense A/c Dr ₹30,00,000 to Provision for Warranty A/c ₹30,00,000.

Answer: Provision for warranty = ₹30,00,000.

Example 2

Bharat Mining Ltd must restore a site at the end of 3 years. The best estimate of the restoration cost is ₹10,00,000 at that date. The pre-tax discount rate is 10%. The company expects to sell the site equipment later for a gain of ₹1,50,000. Compute the provision at initial recognition and the finance cost for the first year.

Show the solution

Expected gains on disposal of the equipment are ignored in measuring the provision.
Undiscounted expected outflow = ₹10,00,000.
Discount factor for 3 years at 10% = 1 ÷ (1.10)³ = 1 ÷ 1.331 = 0.7513.
Present value = ₹10,00,000 × 0.7513 = ₹7,51,300 (approx).
Finance cost for year 1 = ₹7,51,300 × 10% = ₹75,130.
Closing provision after year 1 = ₹7,51,300 + ₹75,130 = ₹8,26,430.

Answer: Initial provision = ₹7,51,300 (approx). Year 1 unwinding charged as finance cost = ₹75,130. The ₹1,50,000 expected gain is ignored.

Exam tips

Look for the words 'large population' or a list of probabilities: that signals expected value, so show a clean table of probability, outcome and product.
Always state why you did or did not discount. A single sentence on materiality earns step marks.
Write 'expected gains on disposal ignored' whenever a question mentions asset sale, as it is a favourite trap.
In MCQs, check whether the answer is pre-discount or post-discount and whether the question asks for the provision or the finance cost.
For multi-year questions, set out a small schedule: opening, unwinding, closing, for each year.

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

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

What is the best estimate under Ind AS 37?

It is the amount the entity would rationally pay to settle the obligation at the end of the reporting period or to transfer it to a third party. It is reached using expected value, the most likely outcome or the mid-point of a range, depending on the facts.

When do I use expected value instead of the most likely outcome?

Use expected value when the provision involves a large population of items, such as warranties or refunds. For a single obligation, the most likely outcome is usually the best estimate, adjusted if other outcomes are mostly higher or lower.

Which discount rate is used for provisions?

A pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. It must not reflect risks already adjusted in the cash flow estimates.

Is the unwinding of discount an operating expense?

No. It is recognised as a borrowing cost (finance cost) in profit or loss as the provision rises each year towards the amount to be paid.