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

Recognition Criteria for Provisions under Ind AS 37

Updated 10 October 2026 · Fact-checked

Under Ind AS 37, you recognise a provision only when all three conditions are met: the entity has a present obligation (legal or constructive) from a past event, an outflow of economic benefits is probable (more likely than not), and a reliable estimate can be made. If any one fails, no provision is recognised.

Understand Recognition Criteria for Provisions

A provision is a liability of uncertain timing or amount. Ind AS 37 does not let you book a provision just because a cost is expected. It sets three tests, and all three must be passed together (paragraph 14).

Test 1: Present obligation from a past event. The obligation may be legal (enforceable by law) or constructive (the entity's actions created valid expectations in others that it will discharge the obligation). The past event is called an obligating event. It exists only when the entity has no realistic alternative to settling the obligation (paragraph 17). Obligations must arise from past events that exist independently of future actions. For example, clean-up cost for environmental damage already caused is a provision. Cost of fitting smoke filters in future is not, because the entity can avoid it by changing its method of operation (paragraph 19).

Test 2: Probable outflow. Here, probable means more likely than not, that is, the chance of outflow is greater than the chance of no outflow (paragraph 23). This is a lower bar than the everyday meaning of 'probable'. The footnote says this meaning does not necessarily apply in other Ind AS. For many similar obligations, such as product warranties, you judge the class as a whole. Outflow for one item may be unlikely, yet outflow for the class may be probable (paragraph 24).

Test 3: Reliable estimate. Estimates are a normal part of financial reporting and do not make a provision unreliable. Except in extremely rare cases, an entity can find a range of possible outcomes and make a sufficiently reliable estimate (paragraph 25). If no reliable estimate is possible, the liability exists but is not recognised; it is disclosed as a contingent liability (paragraph 26).

When a test fails, the item is usually a contingent liability. It is either a possible obligation, or a present obligation that fails the probability or estimate test (paragraph 13). It is disclosed unless the chance of outflow is remote. Provisions are reviewed at each reporting date and reversed if outflow is no longer probable (paragraph 59).

Key rules to remember

Three conditions for a provision (para 14): Provision = Present obligation (legal or constructive) from a past event + Probable outflow + Reliable estimate; All three must be met. If not, no provision is recognised.
Meaning of probable (para 23): Probable = probability of outflow > probability of no outflow; 'More likely than not'. This meaning is specific to Ind AS 37.
Disputed present obligation (para 16): More likely than not that obligation exists → provision (if other criteria met); more likely that no obligation exists → contingent liability (unless outflow remote); Use all evidence at the reporting date, including expert opinion and events after the reporting period.
Obligating event (para 17): No realistic alternative to settlement: enforceable by law, or valid expectation created (constructive); Future expenditure that can be avoided by future action is not a present obligation (para 19).
Class of similar obligations (para 24): Judge probability of outflow for the class as a whole; Typical for warranties. Provision is recognised if outflow for the class is probable.
Joint and several liability (para 29): Part expected to be met by others = contingent liability; part with probable outflow for the entity = provision; Provision still needs a reliable estimate.
Review (para 59): Review each reporting date; reverse if outflow no longer probable; Adjust to the current best estimate.

How to solve Recognition Criteria for Provisions questions

Use this checklist on any question that asks whether to recognise a provision. Write each test separately so the examiner can award step marks.

1Identify the event and the reporting date. Ask what has already happened by that date.
2Test 1: Is there a present obligation, legal or constructive, from a past event? Check that the entity has no realistic alternative to settlement. Ignore costs that depend on future conduct of business.
3If the obligation is disputed, apply the more-likely-than-not test using all evidence, including expert opinion and events after the reporting period.
4Test 2: Is outflow probable, meaning more likely than not? For similar items such as warranties, assess the class as a whole.
5Test 3: Can a reliable estimate be made? Remember a range of outcomes normally allows a sufficiently reliable estimate.
6Conclude. All three met: recognise a provision. Present obligation but probability or estimate test fails, or only a possible obligation: contingent liability, disclosed unless outflow is remote.
7State the amount and the journal entry if the question asks for it.

Quickest way: Three-gate check

When to use it: Use for MCQs and short 'should a provision be made?' questions where you have only a minute or two.

Gate 1: Has the obligating event already happened? If it is only a plan or intention with no valid expectation created, stop: no provision.
Gate 2: Is outflow more than 50% likely? If not, stop: contingent liability or nothing.
Gate 3: Is the amount estimable? If yes, provide. If no, contingent liability.
Write the answer as 'Provision', 'Contingent liability disclosed' or 'Nothing, remote', with one line of reason.

Common mistakes in Recognition Criteria for Provisions

Treating 'probable' as 'almost certain' or 75%+ likely.
Everyday English uses probable for strong likelihood.
Fix: In Ind AS 37, probable means more likely than not. Anything above 50% passes the test.
Creating a provision for future operating costs or planned expenditure, such as fitting new filters.
The cost is certain to occur and seems like a liability.
Fix: Ask if the entity can avoid it by its future actions. If yes, there is no present obligation and no provision.
Ignoring constructive obligations and looking only for a legal duty.
Students link liability only with law or contracts.
Fix: Check whether the entity's actions created valid expectations in others that it will discharge the obligation.
Refusing a provision because the exact amount is unknown.
Confusing uncertainty with unreliability.
Fix: Estimates are normal. Only in extremely rare cases is no reliable estimate possible.
Judging each warranty claim separately and concluding no outflow is probable.
Each single item has a small chance of claim.
Fix: Assess the class of similar obligations as a whole. If some outflow is probable for the class, provide.
Calling every unrecognised item a 'no disclosure' case.
Forgetting the contingent liability route.
Fix: If a present obligation fails probability or estimate, or only a possible obligation exists, disclose a contingent liability unless outflow is remote.

Worked examples

Example 1

Meghdoot Chemicals Ltd. discharged effluent unlawfully into a river during the year ended 31 March 2027. Clean-up is required by law, and the company's engineers estimate it at ₹40,00,000. It also plans to install a new treatment plant costing ₹90,00,000 next year to meet stricter norms, which it could avoid by changing its production method. Advise on provisions at 31 March 2027.

Show the solution

Clean-up cost, Test 1: The unlawful discharge is a past event, and clean-up is enforceable by law. A present obligation exists, independent of future actions (paragraph 19).
Clean-up cost, Test 2: Law requires clean-up, so outflow is more likely than not, hence probable.
Clean-up cost, Test 3: Engineers provide an estimate of ₹40,00,000. This is a sufficiently reliable estimate.
All three tests are met, so recognise a provision of ₹40,00,000.
Treatment plant: The expenditure relates to future operations and can be avoided by changing the method of operation. There is no present obligation, so no provision (paragraph 19).

Answer: Recognise a provision of ₹40,00,000 for clean-up. Do not recognise a provision for the ₹90,00,000 treatment plant.

Example 2

Anand Appliances Ltd. is sued by a customer for ₹15,00,000 for alleged product defects. At the reporting date, the company's lawyers advise that it is more likely than not that the company will lose and be required to pay, and the best estimate of the payment is ₹12,00,000. Separately, another claim of ₹8,00,000 is pending, and lawyers say the company will probably win, though a small chance of loss exists. Decide the treatment of both claims.

Show the solution

Claim 1, Test 1: The disputed obligation is judged using expert opinion. Lawyers say it is more likely than not that a present obligation exists, so Test 1 is met (paragraph 16(a)).
Claim 1, Test 2: Loss is more likely than not, so outflow is probable.
Claim 1, Test 3: Best estimate is ₹12,00,000, a reliable estimate.
Recognise a provision of ₹12,00,000 for Claim 1.
Claim 2: It is more likely that no present obligation exists, so it is not a provision (paragraph 16(b)).
Since a small chance of loss exists and it is not remote, disclose a contingent liability of ₹8,00,000 (nature and estimate as per the standard).

Answer: Claim 1: provision of ₹12,00,000. Claim 2: no provision; disclose a contingent liability of ₹8,00,000.

Exam tips

In MCQs, watch for the words 'more likely than not' and 'probable'. Remember they mean over 50%.
In written answers, name the three conditions and test each one in order. Step marks usually follow this structure.
When a question mentions future plans, closures or equipment purchases, check whether the entity can avoid the cost. This often decides the answer.
Always give the fallback: if a provision fails, say whether it becomes a contingent liability or needs no disclosure because outflow is remote.
Quote paragraph 14 for the three conditions and paragraph 23 for the meaning of probable if you remember them. If unsure of a number, state the rule in words.

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

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, all required. The entity must have a present obligation, legal or constructive, from a past event. An outflow of economic benefits must be probable. A reliable estimate of the amount must be possible.

What does probable outflow mean in Ind AS 37?

It means the outflow is more likely than not to occur, that is, the chance it happens is greater than the chance it does not. This is a lower threshold than 'virtually certain'. The footnote notes this meaning does not necessarily apply in other Ind AS.

Can a provision be recognised if the exact amount is not known?

Yes. Using estimates is an essential part of financial reporting and does not undermine reliability. Except in extremely rare cases, an entity can determine a range of outcomes and make a sufficiently reliable estimate.

What is a constructive obligation, with an example idea?

It arises when an entity's action creates valid expectations in others that it will discharge a responsibility, even without a legal duty. For instance, a company that has a published practice of refunding customers for a fault may create such an expectation. Then it has no realistic alternative to settling.

What happens if the recognition criteria are not met?

No provision is recognised. If it is a possible obligation, or a present obligation that fails the probability or estimate test, it is a contingent liability. You disclose it unless the chance of outflow is remote.