Skip to content

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

Reimbursements, Changes and Use of Provisions under Ind AS 37

Updated 10 October 2026 · Fact-checked

Under Ind AS 37, a reimbursement is shown as a separate asset only when it is virtually certain, capped at the provision. Review provisions at each reporting date and reverse any unneeded amount. Use a provision only for the expenditure it was created for. Never use it for another purpose.

Understand Reimbursements, Changes and Use of Provisions

A provision is a liability of uncertain timing or amount. Once you create it, three things can happen later: someone else may pay part of it, your estimate may change, or you may spend money against it. Ind AS 37 has a clear rule for each.

Reimbursements. Sometimes a third party, such as an insurer or a supplier under a warranty, will repay some or all of the cost. You recognise the reimbursement only when it is virtually certain that you will receive it if you settle the obligation. You show it as a separate asset. You do not net it against the provision on the balance sheet. The amount of the asset cannot be more than the provision.

In the statement of profit and loss, you may present the provision expense net of the reimbursement. This netting is allowed only in the income statement, not on the balance sheet.

Changes. You review provisions at the end of each reporting period and adjust them to the current best estimate. If an outflow of resources is no longer probable, you reverse the provision. Where the effect of time value is material and the provision is discounted, the carrying amount rises each period as the discount unwinds. That increase is treated as a borrowing cost (finance cost).

Use of provisions. You may use a provision only for the expenditure for which it was originally recognised. Setting expenditure of one kind against a provision made for another would hide the effect of two different events. If you need to cover a new expense, you should recognise a new provision if the criteria are met.

An important related point: where the entity is jointly and severally liable with others, the part of the obligation expected to be met by the other parties is treated as a contingent liability.

Key rules to remember

Reimbursement recognition
Recognise asset only if reimbursement is virtually certain
Show as a separate asset. Do not offset against the provision in the balance sheet.
Cap on reimbursement asset
Reimbursement asset ≤ Provision amount
The asset can never exceed the provision, even if the insurer covers more.
Net expense in profit and loss
Net expense = Provision expense − Reimbursement recognised
Netting is permitted only in the statement of profit and loss.
Review and reversal
Review at each reporting date; reverse if outflow is no longer probable
Reverse through the same statement of profit and loss line where the original charge was made.
Unwinding of discount
Finance cost for period = Opening discounted provision × discount rate
Applies when the provision is discounted. It is shown as borrowing cost.
Use of provision
Use only for the expenditure for which it was originally recognised
Spending on something else must not be charged against the provision.

How to solve Reimbursements, Changes and Use of Provisions questions

Use this order for any question on reimbursements, changes or use of provisions.

  1. 1Identify the original obligation and the provision created for it, with its amount.
  2. 2Check whether a third party will repay any part. Decide if recovery is virtually certain. If not, no asset is recognised.
  3. 3If recognised, record the reimbursement as a separate asset, limited to the provision amount.
  4. 4Compute the revised best estimate at the reporting date and find the difference from the carrying amount.
  5. 5Increase the provision by a charge, or reverse the excess as a credit to profit and loss, as the difference requires.
  6. 6If the provision is discounted, add the unwinding of discount as a finance cost.
  7. 7When expenditure is incurred, check it relates to the original purpose. Charge it against the provision only if it does.
  8. 8Pass journal entries and state the closing balance sheet and profit and loss effect.

Quickest way: Four-question check

When to use it: Use this when a short problem asks what to show in the books or notes and time is limited.

  1. Is recovery virtually certain? If not, no asset. If yes, separate asset.
  2. Is the asset higher than the provision? If so, cap it at the provision.
  3. Has the best estimate changed? Adjust the provision to the new figure and take the difference to profit and loss.
  4. Was the spending for the original purpose? If not, do not touch the provision.

Common mistakes in Reimbursements, Changes and Use of Provisions

  • Netting the reimbursement against the provision on the balance sheet.

    Students remember that profit and loss may show a net figure and apply it everywhere.

    Fix: Show the provision as a liability and the reimbursement as a separate asset. Netting is allowed only in profit and loss.

  • Recognising reimbursement when it is only probable.

    Students confuse the test for provisions (probable) with the test for reimbursements.

    Fix: A reimbursement needs to be virtually certain. Probable is not enough.

  • Recording a reimbursement asset higher than the provision.

    The insurer covers more than the loss, and students book the full cover.

    Fix: Cap the asset at the provision amount.

  • Using an old provision to absorb a different expense.

    Students treat a provision as a general reserve.

    Fix: Use it only for its original purpose. Create a fresh provision if a new obligation meets the criteria.

  • Leaving an unneeded provision in the books.

    Students forget the reporting-date review.

    Fix: At each year end, reverse any excess or the entire provision if outflow is no longer probable.

  • Treating unwinding of discount as an operating expense.

    It looks like an increase in the provision, so students charge it to the same expense line.

    Fix: Show it as a finance cost (borrowing cost).

Worked examples

Example 1

Sunrise Auto Ltd. faces a legal claim for damages from a customer. At 31 March it provides ₹8,00,000 as the best estimate of the settlement. Its insurer has confirmed in writing that it will reimburse ₹6,00,000 of any settlement, and recovery is virtually certain. Show the treatment.

Show the solution
  1. The obligation is recognised: provision ₹8,00,000, charged to profit and loss.
  2. Reimbursement is virtually certain, so recognise an asset of ₹6,00,000. It is below the provision, so the cap is met.
  3. Balance sheet: provision ₹8,00,000 as a liability and reimbursement receivable ₹6,00,000 as a separate asset. Do not offset.
  4. Profit and loss may show net expense: ₹8,00,000 − ₹6,00,000 = ₹2,00,000.
  5. Entries: Profit and Loss A/c Dr ₹8,00,000 to Provision for Legal Claim A/c ₹8,00,000; Insurance Claim Receivable A/c Dr ₹6,00,000 to Profit and Loss A/c ₹6,00,000.

Answer: Provision ₹8,00,000 (liability) and reimbursement asset ₹6,00,000 shown separately; net profit and loss charge ₹2,00,000.

Example 2

Bharat Chemicals Ltd. made a provision of ₹5,00,000 for an environmental clean-up on 31 March 2026. On 31 March 2027 the best estimate of the cost is ₹3,50,000. During the year it spent ₹40,000 on repairing a damaged plant machine, and the accountant wants to charge this to the provision. Advise.

Show the solution
  1. The provision was created for clean-up, not for machinery repairs. The repair of ₹40,000 is a different expenditure.
  2. Do not charge the repair against the provision. Charge it to repairs expense in profit and loss.
  3. Review the provision at the year end. The revised best estimate is ₹3,50,000 and the carrying amount is ₹5,00,000.
  4. Excess = ₹5,00,000 − ₹3,50,000 = ₹1,50,000. Reverse this to profit and loss.
  5. Entry: Provision for Clean-up A/c Dr ₹1,50,000 to Profit and Loss A/c ₹1,50,000.
  6. Closing provision is ₹3,50,000.

Answer: The ₹40,000 repair is charged to profit and loss, not the provision. ₹1,50,000 of the provision is reversed, leaving ₹3,50,000.

Exam tips

  • In a short note, say that reimbursement needs 'virtually certain' and that it is a separate asset. Examiners look for both phrases.
  • Draw the balance sheet and profit and loss effect separately. Marks are often lost because students show only one of them.
  • When a question mentions a different expense charged to a provision, state the principle first (use only for original purpose), then correct the entry.
  • In MCQs, watch for options that offset the reimbursement on the balance sheet or allow it above the provision. Both are wrong.
  • Always check the reporting-date review. A changed estimate in the question is a prompt to adjust or reverse.

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

Reimbursements, Changes and Use of Provisions: frequently asked questions

When can I recognise a reimbursement of a provision under Ind AS 37?

Only when it is virtually certain that you will receive it if you settle the obligation. You record it as a separate asset, and it cannot exceed the provision.

Can a provision be used for another purpose?

No. A provision may be used only for the expenditure for which it was originally recognised. A different expense needs its own provision if the recognition criteria are met.

When should a provision be reversed?

Review provisions at each reporting date. If an outflow of resources is no longer probable, reverse the provision. If the estimate falls, reverse the excess to profit and loss.

Can I net the reimbursement against the provision in the financial statements?

In the statement of profit and loss, you may show the expense net of the reimbursement. In the balance sheet, you must show the provision and the reimbursement asset separately.