Full explanation
Overview
One legal claim, read two ways. A five hundred thousand euro liability — or nothing at all.
That one percentage point is the whole of IAS 37. Provisions, contingent liabilities, contingent assets — the standard that decides what a company is allowed to call a liability before anyone has actually been paid. Today: the recognition test, what a provision may and may not include, and the judgement calls that decide it.
When is it a liability ?
A provision is only recognised when three things are all true. First, a present obligation — legal or constructive — exists because of a past event. Second, it is probable that settling it will require an outflow of economic benefits — probable simply means more likely than not, over fifty percent. Third, the amount can be reliably estimated. Miss any one of the three and there is no provision — at most, a disclosure.
One percentage point, €500,000
Watch what fifty-one percent versus forty-nine percent actually does. Meridian Limited faces a lawsuit. Expected settlement, five hundred thousand euros. Meridian's lawyers rate it fifty-one percent likely — probable — so the full five hundred thousand is recognised as a liability today. A rival company faces the identical claim, but its own lawyers rate it forty-nine percent — not probable. It recognises nothing. It merely discloses a contingent liability in the notes. Same facts, same amount, opposite balance sheets — because probability is a judgement, not a fact.
Deliberately asymmetric
A contingent liability is never recognised — only disclosed, unless the chance of outflow is remote. A contingent asset is treated even more cautiously: it is never recognised until the inflow is virtually certain — and at that point, it is no longer contingent at all. It simply becomes an asset. IAS 37 is asymmetric on purpose: quick to make you disclose a possible cost, slow to let you book a possible gain.
So recognition is a cliff edge, and contingent items cut both ways. Now the provision everyone gets wrong on the way in — restructuring.
A board decision is not enough
A restructuring provision needs a constructive obligation — and that requires a detailed formal plan, plus a valid expectation raised in the people affected, either by starting to implement it or by announcing its main features to them. A board simply deciding to restructure is not enough. Until employees have been told, there is no obligation — and no provision.
Three costs that don't belong
Meridian is closing one factory. Redundancy costs: eight hundred thousand euros. Lease termination penalty on the building: one hundred and fifty thousand. Correct provision: nine hundred and fifty thousand. Now the trap. A junior accountant also adds retraining continuing staff, one hundred and twenty thousand; relocating continuing staff, sixty thousand; and remarketing the brand, forty thousand — two hundred and twenty thousand euros that IAS 37 explicitly excludes, because they relate to the future conduct of the business, not to closing this one. Include them and the provision is overstated by exactly that amount: one million, one hundred and seventy thousand instead of nine hundred and fifty thousand.
The cheaper way out, always
A contract is onerous when the unavoidable costs of meeting it exceed the economic benefit expected from it. But unavoidable cost is not simply the cost of finishing the job — it is the LOWER of two numbers: the net cost of fulfilling the contract, or whatever it costs to walk away — any compensation or penalty for failing to perform. IAS 37 assumes you take the cheaper exit.
€500,000, not €600,000
After closing the factory, Meridian is still locked into a raw-materials contract it no longer needs. Finishing it costs nine hundred thousand euros; the materials it would receive are worth three hundred thousand on resale — a net cost to fulfil of six hundred thousand. But the contract also has an exit penalty of five hundred thousand. The lower of the two is five hundred thousand — so that is the unavoidable cost, and that is the provision. Not six hundred thousand. Providing for the option you would actually take, not the one you are stuck describing.
Restructuring is a judgement about people. Onerous contracts are pure arithmetic. Now, a rule with no smoothing at all — where an entire year's cost can land on a single day.
A whole year, one day
IFRIC 21 governs levies — government-imposed charges within the scope of IAS 37. The obligating event is whatever activity the legislation actually names, not the passage of time. If the law says the levy is payable simply for operating on the first of January, the ENTIRE year's levy — two hundred and forty thousand euros — is recognised in full on that one day. A company that sells its business on the thirty-first of December, the day before, recognises nothing. No accrual. No smoothing. One date decides it.
Where provisions actually bite
That same all-or-nothing logic shows up in four everyday industries. A retailer's product-return warranty: probable and estimable from sales history, provided every year without a second thought. A pharmaceutical company's site-remediation obligation: virtually certain eventually, but the AMOUNT depends on a discount rate decades out. An airline's engine-overhaul contract: onerous only if traffic falls enough that the unavoidable cost turns negative. A software company's litigation over a patent claim: the entire liability can swing from zero to material on one expert opinion about likelihood. Same standard, four completely different fights.
Four industries, four completely different fights. There is one place IAS 37 lets you go quiet — but only rarely, and only for one reason.
The one place you may go quiet
Disclosure normally means describing the nature of a provision, the timing and any uncertainty over the amount, and whether reimbursement is expected. IAS 37 carves out one narrow exception: where disclosure would seriously prejudice the entity's position in an actual dispute with the other party — for example, revealing your own legal strategy mid-litigation — that detail may be omitted. The fact that something has been left out must still be disclosed. Prudence, not concealment.
Gross on one statement, net on the other
Meridian faces a four hundred thousand euro product-liability claim. Its insurer is virtually certain to reimburse three hundred and fifty thousand of it. The reimbursement is recognised as a SEPARATE asset — never netted against the provision on the balance sheet, so both sides stay visible at four hundred thousand and three hundred and fifty thousand. In the profit and loss statement, though, the expense MAY be shown net: fifty thousand. Gross on the balance sheet. Net allowed in the income statement. The two statements are allowed to disagree.
The price of waiting
Where settlement is a year or more away and the time value of money is material, a provision is discounted to present value. Meridian's decommissioning obligation: one million euros, payable in ten years. Discounted at five percent, that is six hundred and thirteen thousand, nine hundred and thirteen euros today. Each year, the liability grows back toward the full million as the discount unwinds — and that unwind is recognised as interest expense, not as an operating cost.
Two more mechanics before the boundaries — being paid back, and the price of waiting. That interest expense actually lands somewhere surprising under the newest rule of all.
Interest goes to financing
From January twenty twenty-seven, IFRS 18 puts the unwinding of discount on a provision into the FINANCING category — it is interest on a liability, full stop. That is the opposite placement to IAS 2's net realisable value write-down, which lands in operating. Two standards, two different categories, same new regime — read the category, not just the number.
Recognised even when not probable
One more boundary, and it runs the other way. A contingent liability ASSUMED in a business combination is recognised at its acquisition-date fair value even when an outflow is not probable — say, eighty-five thousand euros for a claim rated only thirty percent likely. IFRS 3 overrides IAS 37's own fifty percent threshold, because the uncertainty gets priced into the fair value instead of tested against a probability line. The one place a contingent liability CAN appear on the balance sheet on day one.
PROPOSED — NOT YET LAW
The IASB issued an ee-dee in November twenty twenty-four proposing targeted improvements — this is PROPOSED, not law, comment period closed March twenty twenty-five, still under discussion as of June twenty twenty-six. Three changes on the table: splitting the present-obligation test into three explicit questions, which would let levy-type liabilities build up progressively instead of landing on one day; extending the onerous-contracts cost approach to provisions generally; and, the big one, requiring long-term provisions to be discounted at a RISK-FREE rate that excludes the entity's own credit risk — which would make every long-dated provision bigger than it is today. It would also fold IFRIC 6 and IFRIC 21 directly into IAS 37 itself.
And the standard itself isn't finished changing. Now, where IAS 37 actually sits against everything around it.
Only where nothing more specific applies
IAS 37 is deliberately the RESIDUAL standard — it applies to non-financial liabilities only where nothing more specific does. Financial guarantees and loan commitments belong to IFRS 9. Insurance contracts belong to IFRS 17. Construction and other customer contracts belong to IFRS 15. Employee benefits belong to IAS 19. Income taxes belong to IAS 12. If a more specific standard exists, IAS 37 steps aside — it only governs what is left.
Every euro traceable to a paragraph
Meridian's actual provisions note. Restructuring: nine hundred and fifty thousand. Onerous contract: five hundred thousand. Product liability, net of the expected insurance recovery: fifty thousand. Total provisions: one million, five hundred thousand euros. Every euro traceable to a paragraph, and every euro the result of a judgement someone had to make and defend.