Library / Technical Accounting Manual: IFRS, IAS and Ind AS Equivalents

IAS 37 - Provisions, Contingent Liabilities and Contingent Assets

Indian equivalent: Ind AS 37 - Provisions, Contingent Liabilities and Contingent Assets

Objective and scope

IAS 37 decides when a company must record a liability for something uncertain (a provision), and when it should merely disclose a possible obligation (contingent liability) or a possible gain (contingent asset) - stopping both the ignoring of real costs and the inventing of fake ones.

Core principle

Businesses face uncertain future costs - lawsuits, warranties, clean-up bills. IAS 37's test for booking a provision is three-fold: is there a present obligation from a past event, is an outflow probable, and can it be reliably estimated? If any fails, it's usually just a disclosed contingency, not a booked liability.

Defined terms and technical terminology

Term	Technical meaning
Provision	A liability of uncertain timing or amount that must be recognised when the three tests are met.
Present obligation	A duty that already exists today because of a past event (legal or constructive).
Constructive obligation	An obligation from the entity's own past conduct or public statements creating a valid expectation it will act.
Contingent liability	A possible obligation not recognised but disclosed (not probable, or can't be measured reliably).
Contingent asset	A possible future gain - only disclosed when probable, and recognised only when virtually certain.
Probable	More likely than not - generally >50%.
Onerous contract	A contract where unavoidable costs exceed the benefits - a provision is required for the net loss.

Application and worked illustrations

The three-part recognition test

A provision is recognised only if all three are true: (1) a present obligation (legal or constructive) from a past event; (2) it is probable an outflow of resources will be needed; and (3) the amount can be reliably estimated. Fail any test and it becomes a contingent liability - disclosed, not booked (unless the chance of outflow is remote, in which case nothing at all).

Worked example 1 - warranty provision

ElectroMart sells 10,000 TVs with a 1-year warranty; history shows 3% need repairs at ₹2,000 each. The obligating event (sale with warranty) has occurred, an outflow is probable, and it's estimable: 10,000 × 3% × ₹2,000 = ₹6,00,000. A provision is required now, matching the future cost to this year's sales.

Journal entry - Recognise warranty provision
Account	Debit (₹)	Credit (₹)
Warranty expense (P&L)	6,00,000
Warranty provision (liability)		6,00,000

Worked example 2 - a lawsuit (three outcomes)

A customer sues ElectroMart for ₹50 lakh. If lawyers say it will probably lose and the amount is estimable → provision. If losing is only possible (not probable) → contingent liability, disclosed only. If the chance is remote → nothing. And if ElectroMart is instead suing someone and might win, that possible gain is a contingent asset - disclosed only if probable, recognised only when virtually certain. This asymmetry (book likely losses, wait on likely gains) is prudence.

Onerous contracts and restructuring

If a contract becomes onerous (unavoidable costs exceed benefits - e.g., a lease on premises you've vacated but must keep paying for), a provision for the net loss is required. A restructuring provision is only recognised when there is a detailed formal plan and a valid expectation has been raised in those affected (constructive obligation).

Common mistake: providing for future operating losses. Expected future losses are not a present obligation and cannot be provided for.

IND AS LINK

Ind AS 37 aligns with IAS 37 - same recognition tests, onerous-contract rule, and treatment of contingencies.

Further worked illustrations

Extra numeric example - discounting a long-term provision

A mining company must restore a site in 10 years at an estimated cost of ₹1,00,00,000. Because the obligation is far off, IAS 37 requires it to be discounted to present value. At an 8% discount rate, the provision today ≈ ₹1,00,00,000 ÷ (1.08)¹⁰ ≈ ₹46,30,000. Each year the provision is unwound - interest is added - until it reaches ₹1 crore at year 10.

Journal entry - Set up the restoration provision (and asset)
Account	Debit (₹)	Credit (₹)
PPE - site restoration asset	46,30,000
Restoration provision (liability)		46,30,000

INDIAN REGULATORY CONTEXT

Indian power, mining and telecom companies (e.g., tower operators obligated to dismantle sites) recognise decommissioning provisions under Ind AS 37, with the matching cost capitalised into the related asset (Ind AS 16). The annual unwinding of discount shows up as a finance cost - a detail auditors watch closely.

TECHNICAL EDGE CASE

A retailer has no legal duty to refund customers beyond warranty, but has a well-known published policy of giving refunds on any dissatisfaction, and always honours it. This creates a constructive obligation: the past conduct has built a valid expectation, so a provision for expected refunds is required - even without any contract or law forcing it. The obligation flows from the company's own established practice.