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IAS 37

Provisions, Contingent Liabilities and Contingent Assets

IAS 37 sets the recognition criteria and measurement basis for provisions (liabilities of uncertain timing or amount), and prescribes disclosure-only treatment for contingent liabilities and contingent assets, establishing that a provision is recognised only when a present obligation exists, an outflow is probable, and a reliable estimate can be made. [S1]

Effective 1999-07-01Related: IAS 1 · IAS 8 · IAS 10 · IAS 16 · IAS 36

Overview

IAS 37 draws a firm line between three categories: a provision (recognised as a liability because a present obligation exists, an outflow of resources is probable, and the amount can be reliably estimated), a contingent liability (disclosed only, because either an outflow is not probable or a reliable estimate cannot be made, or because the obligation's existence will only be confirmed by an uncertain future event), and a contingent asset (disclosed only when an inflow is probable, and never recognised until virtually certain, at which point it is no longer contingent). [S1] It also gives specific guidance on onerous contracts and restructuring provisions. [S2]

Why it matters

Provisions and contingencies are where judgement, not mechanical calculation, drives the numbers: litigation exposure, warranty costs, restructuring plans, and onerous contracts all require management to estimate the probability and amount of future outflows. Overstating provisions understates profit and can be used to smooth earnings; understating or omitting them hides real risk from lenders, investors and regulators. Both are common findings in audits of Nigerian entities facing litigation, regulatory sanctions, or contract disputes.

Scope

Applies to all provisions, contingent liabilities and contingent assets except those resulting from executory contracts (unless onerous) and those covered by another Standard, including provisions covered by IFRS 15 (some), IFRS 16 (lease liabilities), IAS 12 (income taxes), IAS 19 (employee benefits), IFRS 9 (financial instruments), IFRS 3 (business combinations contingent consideration) and insurance contracts within IFRS 17. [S2]

Key definitions

term
Provision
definition
A liability of uncertain timing or amount.
term
Liability
definition
A present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow of economic resources.
term
Obligating event
definition
An event that creates a legal or constructive obligation that results in an entity having no realistic alternative to settling that obligation.
term
Constructive obligation
definition
An obligation arising from an entity's established pattern of past practice, published policies, or a sufficiently specific current statement, that has created a valid expectation that the entity will discharge those responsibilities.
term
Contingent liability
definition
A possible obligation whose existence will be confirmed only by uncertain future events not wholly within the entity's control, or a present obligation not recognised because settlement is not probable or the amount cannot be reliably estimated.
term
Contingent asset
definition
A possible asset whose existence will be confirmed only by the occurrence or non-occurrence of uncertain future events not wholly within the entity's control.
term
Onerous contract
definition
A contract in which the unavoidable costs of meeting the obligations exceed the economic benefits expected to be received under it.

Recognition

A provision is recognised only when all three conditions are met: (1) the entity has a present obligation (legal or constructive) as a result of a past event; (2) it is probable (more likely than not) that an outflow of resources embodying economic benefits will be required to settle the obligation; and (3) a reliable estimate can be made of the amount of the obligation. If any condition is not met, no provision is recognised; instead, a contingent liability may need to be disclosed unless the possibility of an outflow is remote. A restructuring provision is recognised only once the entity has a detailed formal plan and has raised a valid expectation in those affected that it will carry out the restructuring, by starting to implement it or announcing its main features to those affected; a management or board decision alone, without that communication, is not enough.

Initial measurement

A provision is measured at the best estimate of the expenditure required to settle the present obligation at the reporting date — the amount the entity would rationally pay to settle the obligation or transfer it to a third party. Where the provision involves a large population of items, the estimate uses an expected-value approach (weighting possible outcomes by their probabilities); where a single obligation is being measured, the individual most likely outcome may be the best estimate, adjusted for other possible outcomes. Risks and uncertainties are reflected in the measurement, and where the effect of the time value of money is material, the provision is discounted to present value using a pre-tax rate reflecting current market assessments of the time value of money and the risks specific to the liability.

Subsequent measurement

Provisions are reviewed at each reporting date and adjusted to reflect the current best estimate; if it is no longer probable that an outflow will be required, the provision is reversed. Where discounting was applied, the unwinding of the discount is recognised as a finance cost, not as an adjustment to the original expense. A provision is used only for expenditures for which it was originally recognised; costs unrelated to the original obligation are expensed separately as incurred.

Presentation

Provisions are presented as liabilities, split between current and non-current based on expected timing of settlement. Contingent liabilities and contingent assets are not recognised in the statement of financial position at all — they are described in the notes, with an estimate of financial effect where practicable. A reconciliation of the carrying amount of each class of provision from the opening to the closing balance (additions, amounts used, unused amounts reversed, and the unwinding of any discount) is required in the notes.

Disclosure checklist

  • For each class of provision: the carrying amount at the start and end of the period, additional provisions made, amounts used, unused amounts reversed, and the increase from unwinding the discount and the effect of any change in discount rate.
  • A brief description of the nature of the obligation and the expected timing of any resulting outflows.
  • An indication of the uncertainties about the amount or timing of outflows, and the major assumptions made concerning future events.
  • The amount of any expected reimbursement, stating the amount of any asset recognised for that expected reimbursement.
  • For each class of contingent liability (unless remote): a brief description, an estimate of its financial effect (if practicable, with disclosure if not), an indication of uncertainties, and the possibility of any reimbursement.
  • Where an inflow of economic benefits from a contingent asset is probable: a brief description and, where practicable, an estimate of its financial effect.
  • In extremely rare cases where disclosure would seriously prejudice the entity's position in a dispute, the general nature of the dispute together with the fact that, and reason why, information has not been disclosed.

Practical treatment

The most useful discipline is running each potential item through the three-part test in sequence — present obligation, probable outflow, reliable estimate — and documenting the conclusion at each step, rather than jumping straight to a number. For litigation, legal counsel input on the probability of an adverse outcome is essential and should be obtained and documented each reporting period, not assumed to carry over unchanged from the prior year. For onerous contracts, the unavoidable cost of meeting the obligation includes the lower of the cost of fulfilling the contract and any compensation or penalties from failing to fulfil it. Restructuring provisions require a genuinely detailed, board-approved plan communicated to those affected before commitment date — an internal decision alone, or a plan announced after the reporting date, does not create the obligation at the reporting date. See nigeria_notes for common Nigerian litigation, regulatory and tax-dispute scenarios.

Common mistakes

  • Recognising a provision for future operating losses, which IAS 37 explicitly prohibits since there is no present obligation arising from a past event.
  • Recognising a restructuring provision based on a board decision alone, without a detailed formal plan communicated to those affected before the reporting date.
  • Failing to discount a material long-term provision (e.g. a multi-year decommissioning or site restoration obligation) to present value.
  • Disclosing a contingent liability at the same amount that should instead be recognised as a provision, because the probability and reliable-estimate tests were actually met.
  • Recognising a contingent asset before the inflow is virtually certain, rather than merely probable.
  • Not obtaining or documenting updated legal counsel input on litigation provisions each reporting period.

CFO checklist

  • Maintain a documented, reporting-date-by-reporting-date assessment of every material litigation, regulatory and contractual exposure against the three-part recognition test.
  • Obtain and document updated legal counsel views on litigation probability and quantum each reporting period.
  • Confirm any restructuring provision is supported by a detailed, board-approved plan communicated to those affected before the reporting date, not merely an internal decision.
  • Discount material long-dated provisions to present value using a defensible, disclosed pre-tax rate.
  • Review onerous contracts (supply agreements, leases not within IFRS 16, long-term service contracts) where costs now exceed expected benefits.
  • Reconcile the provisions note roll-forward (opening balance, additions, utilisation, reversals, unwinding of discount) to the general ledger each period.

FAQs

q
We're being sued and our lawyers think we'll probably lose, but the amount is uncertain — do we recognise a provision?
a
If an outflow is probable (more likely than not) and a reliable estimate can be made — even if it's a range, using the best point estimate within that range — a provision should be recognised. Uncertainty about the exact amount does not by itself prevent recognition; only an inability to make any reliable estimate would.
q
Can we provide for future losses we expect next year due to a market downturn?
a
No. IAS 37 prohibits recognising a provision for future operating losses because there is no present obligation arising from a past event — expected future losses are simply not provided for in advance, however probable they seem.
q
We announced a restructuring plan to staff two weeks after year-end, before the accounts were authorised for issue — do we provide for it at year-end?
a
No, unless a detailed formal plan already existed and had already been announced to those affected before the year-end date itself. An announcement after year-end, even if before authorisation for issue, does not create a present obligation as at the reporting date; it may instead be a non-adjusting subsequent event requiring disclosure under IAS 10 if material.

Nigeria application notes

Regulatory overlay

IAS 37 applies in full to Nigerian public interest entities under the FRCN Act 2011 mandate. [S4] Under CAMA 2020, directors are required to ensure financial statements give a true and fair view, which in practice requires the same rigorous, evidence-based assessment of litigation and regulatory exposures that IAS 37 demands, rather than a conservative blanket provision or an optimistic blanket non-disclosure. [S6]

Tax interaction (Nigeria)

An accounting provision recognised under IAS 37 is not automatically deductible for companies income tax purposes; deductibility depends on whether the underlying expense meets the current statutory deduction rules, and punitive payments such as fines and penalties for default or violation of the law are expressly not deductible for CIT purposes under the Nigeria Tax Act 2025, regardless of how they are provided for in the accounts. [S5] The Act also introduced a Development Levy (generally 4% of assessable profits for companies other than small companies), which is itself a statutory charge rather than something an entity provides for under IAS 37. [S_TAX1][S_TAX2] Nigerian rates, thresholds, exemptions, incentives and filing rules referenced in this file (including CIT, VAT, capital allowance rates and the small-company threshold) should be independently verified against the Nigeria Tax Act 2025, the Nigeria Tax Administration Act 2025, and current NRS practice in force at the reporting or filing date, since thresholds, rates and reliefs are subject to periodic revision and to sector- or entity-specific qualifying conditions. This file does not constitute legal or tax advice. [S_TAX1][S_TAX2]

FX considerations

Provisions denominated in, or expected to be settled in, a foreign currency (for example an arbitration award or an import-related contractual penalty) are monetary items under IAS 21 and are retranslated at the closing rate at each reporting date, with the exchange difference recognised in profit or loss alongside the unwinding of any discount; naira volatility can materially change the naira-equivalent carrying amount of a foreign-currency provision from one period to the next even without any change in the underlying obligation.

SME practical note

Owner-managed Nigerian businesses frequently either ignore ongoing litigation entirely in their accounts or provide for the full claimed amount regardless of merit; Outliers recommends obtaining a short written assessment from the client's litigation counsel each reporting period, however informal, as the minimum evidential basis for the recognition/disclosure judgement, rather than relying on management's own view of the claim's merits.

Common Nigerian pitfalls

  • Providing for the full amount claimed in a lawsuit without a documented legal assessment of the probability of an adverse outcome.
  • Assuming a provision automatically generates a tax deduction, when fines, penalties and certain other provisioned costs are not deductible under current Nigerian tax rules.
  • Failing to retranslate a foreign-currency-denominated provision (e.g. an international arbitration exposure) at the closing rate each period.
  • Treating a board's internal decision to restructure as sufficient for recognition without the detailed plan and communication to those affected that IAS 37 requires.

FRC pronouncements

No FRCN pronouncement specific to provisions and contingencies accounting under IAS 37 itself has been identified; the relevant general FRCN context is its overarching mandate to promote IFRS compliance and enforce true-and-fair-view financial reporting. [S4]

Worked examples

Provision for a probable litigation settlement

A company is a defendant in a breach-of-contract claim relating to a supply dispute that arose before the reporting date. External legal counsel advises, at the reporting date, that it is probable the company will lose and estimates a settlement in the range of ₦25,000,000 to ₦35,000,000, with ₦28,000,000 assessed as the most likely outcome.

Facts

Workings

Present obligation exists (the dispute arises from a past event, and the claim is not merely a possible future event).

Outflow is probable per legal counsel's assessment.

A reliable estimate can be made using the most likely outcome within the assessed range: 28,000,000.

All three IAS 37 recognition conditions are met — a provision, not merely a contingent liability disclosure, is required.

Journal entries

Recognise a provision for the probable litigation settlement at the best estimate of the amount required to settle the obligation.

AccountDr (₦)Cr (₦)
Litigation expense (profit or loss)28,000,000
Provision for litigation (liability)28,000,000

Onerous contract provision

A company has a non-cancellable supply contract with two years remaining. The unavoidable cost of fulfilling the contract (direct costs plus an allocation of other directly related costs) is ₦90,000,000 over the remaining term, while the economic benefits expected to be received (revenue from the counterparty) are only ₦70,000,000 over the same period. There is no realistic way to exit the contract without penalty exceeding this net cost.

Facts

Workings

Net unavoidable cost (the amount by which unavoidable costs exceed expected benefits): 90,000,000 - 70,000,000 = 20,000,000

This net unavoidable cost is recognised as an onerous contract provision.

Journal entries

Recognise a provision for the onerous element of the supply contract.

AccountDr (₦)Cr (₦)
Onerous contract expense (profit or loss)20,000,000
Provision for onerous contract (liability)20,000,000

Sources & citations

  1. [S1]IAS 37 Provisions, Contingent Liabilities and Contingent Assets — IFRS Foundationaccessed 2026-07-18
  2. [S2]IAS 37 Provisions, Contingent Liabilities and Contingent Assets — IFRS in Brief — Moore Globalaccessed 2026-07-18
  3. [S3]IAS 37 Provisions: Recognition, Measurement and Disclosures — LegalClarityaccessed 2026-07-18
  4. [S4]IFRS - Use of IFRS Standards by jurisdiction: Nigeria — IFRS Foundationaccessed 2026-07-18
  5. [S5]Nigeria - Corporate - Deductions — PwC Worldwide Tax Summariesaccessed 2026-07-18
  6. [S6]Highlights of the provisions relating to financial statements, audit and annual returns in CAMA 2020 — Dentons ACAS-Lawaccessed 2026-07-18
  7. [S_TAX1]Nigeria Tax Act, 2025 has been signed – highlights — EY Globalaccessed 2026-07-18
  8. [S_TAX2]The Nigerian Tax Reform Acts — PwC Nigeriaaccessed 2026-07-18
Last reviewed 2026-07-18 · Reviewer: Rafiu Olawuyi, FCA (Author / Technical Reviewer)