IAS 37 is generally examinable at Level 3: provisions, contingent liabilities and contingent assets, recognition, measurement, present obligations, restructuring principles and disclosure.
The PoE specifically places restructuring at Level 2. Understand the principles and apply them, but do not treat it as a full Level 3 calculation topic.
IAS 10 is included at Level 3 as a pervasive standard supporting presentation and disclosure relating to IFRS/topics in the syllabus.
Both standards are heavily scenario-driven. The exam is likely to test whether you can identify the correct accounting consequence rather than merely reproduce definitions.
Start every IAS 37 question by asking:
Legal or constructive obligation arising from a past event.
More likely than not that resources embodying economic benefits will be required.
If all three recognition conditions are met, recognise a provision.
| Classification | Accounting treatment | Typical exam question |
|---|---|---|
| Provision | Recognise liability and expense/other appropriate debit. | Do the recognition criteria exist? |
| Contingent liability | Normally disclose, unless the possibility of outflow is remote. Do not recognise merely because an obligation is possible. | Possible obligation? Uncertain obligation? Probability? |
| Contingent asset | Do not recognise an uncertain asset merely because an inflow is possible. Disclosure may be required; recognition becomes appropriate only when the relevant threshold is met. | Is the inflow possible, probable or virtually certain? |
A. Present obligation from a past event
A provision requires a present obligation resulting from a past event. The obligation can be:
- Legal — arising from a contract, legislation or other operation of law.
- Constructive — created by an entity's actions where it has indicated to other parties that it will accept certain responsibilities and, as a result, has created a valid expectation that it will discharge them.
B. Probable outflow
The entity must assess whether an outflow of resources embodying economic benefits is probable. If the outflow is not probable, the item is generally treated as a contingent liability rather than a provision, subject to the standard's detailed requirements.
C. Reliable estimate
A provision is recognised only where a sufficiently reliable estimate can be made. In practice, many obligations can be estimated using expected-value or most-likely-outcome techniques.
D. Provision vs contingent liability
| Question | Provision | Contingent liability |
|---|---|---|
| Present obligation? | Yes | Possible obligation, or present obligation that fails the recognition criteria |
| Outflow? | Probable | Not sufficiently probable for recognition |
| Measurement? | Reliable estimate | Not recognised |
| Statement of financial position? | Yes | No |
| Disclosure? | Required disclosures, subject to IAS 37 | Generally disclose unless possibility of outflow is remote |
Best estimate
The amount recognised as a provision is the best estimate of the expenditure required to settle the present obligation at the reporting date.
Expected-value approach may be appropriate: probability-weight the possible outcomes.
The most likely outcome may be the appropriate starting point, while considering other possible outcomes where relevant.
Risks and uncertainties
Risks and uncertainties surrounding the underlying events should be considered in reaching the best estimate. Do not deliberately overstate a provision merely because outcomes are uncertain.
Discounting
Where the effect of the time value of money is material, the provision is measured at the present value of the expenditures expected to be required to settle the obligation.
As the discount unwinds, the increase in the provision arising from passage of time is generally recognised as a finance cost.
Reimbursements
Where some or all of the expenditure required to settle a provision is expected to be reimbursed by another party, the reimbursement is considered separately and recognised only when the applicable IAS 37 criteria are met. The reimbursement asset should not exceed the provision.
Future operating losses
Onerous contracts
An onerous contract is one in which the unavoidable costs of meeting the obligations exceed the economic benefits expected to be received under the contract.
Once the contract is onerous, the resulting present obligation is recognised as a provision, subject to the detailed requirements.
Restructuring LEVEL 2
For IAC purposes, know the principle rather than turning restructuring into an oversized technical study area. A restructuring provision requires a sufficiently specific plan and a present obligation; a board decision or management intention alone does not automatically create the obligation.
Decommissioning / restoration
Where another IFRS requires a liability for a present obligation associated with dismantling, removing or restoring an asset/site, IAS 37 principles may interact with the initial measurement of the related asset and subsequent measurement.
Environmental obligations, litigation and warranties
- Litigation: identify whether a present obligation exists and assess probability and measurement.
- Warranties: assess whether the entity has a present obligation arising from past sales and estimate the expected cost of settlement.
- Environmental damage: do not recognise simply because management intends to clean up; identify the source of the present obligation.
Disclosure
For recognised provisions, disclose the nature of the obligation, expected timing, uncertainties and relevant movements/other information required by IAS 37. Contingent liabilities generally require disclosure unless the possibility of an outflow is remote. Contingent assets have their own disclosure/recognition thresholds.
IAS 10 deals with events occurring between the end of the reporting period and the date when the financial statements are authorised for issue.
Provides evidence of conditions that existed at the end of the reporting period.
Accounting: Adjust recognised amounts or recognise items that should have been recognised.Indicates conditions that arose after the reporting period.
Accounting: Do not adjust amounts for the event itself, but disclose material events and their financial effect where required.The key question
- Yes → adjusting event.
- No → non-adjusting event.
| Scenario | Likely classification | Reasoning |
|---|---|---|
| Customer bankruptcy shortly after year-end confirms that the customer was already credit-impaired at year-end. | Adjusting | Provides evidence about a condition existing at year-end. |
| Fire destroys a factory after year-end. | Non-adjusting | The destructive event occurred after year-end. |
| Court settlement after year-end provides evidence about an obligation existing at year-end. | Adjusting | Provides evidence of a year-end condition. |
| Major acquisition agreed after year-end. | Non-adjusting | The acquisition event arose after year-end; materiality may require disclosure. |
Going concern
Dividends
Dividends declared after the reporting period are generally not recognised as a liability at the end of the reporting period because the obligation did not exist at that date. If relevant, they are disclosed in accordance with IAS 10.
Authorisation date
Always establish the date on which the financial statements are authorised for issue. Events occurring after that date are outside the IAS 10 “events after the reporting period” window.
The classic exam combination
IAS 37 determines whether an obligation existed at year-end and whether a provision should be recognised. IAS 10 then asks whether information received after year-end provides additional evidence about that year-end obligation.
| Step | Question | Accounting consequence |
|---|---|---|
| 1 | What happened before year-end? | Identify the underlying event/condition. |
| 2 | Was there a present obligation at year-end? | Apply IAS 37. |
| 3 | Was an outflow probable and reliably measurable? | Recognise provision if all criteria are met. |
| 4 | What happened between year-end and authorisation? | Apply IAS 10. |
| 5 | Does the later event provide evidence of the year-end condition? | Adjust if it is an adjusting event. |
| 6 | Did the condition arise after year-end? | Do not adjust; consider disclosure if material. |
Integration with other standards
Tax consequences may follow the underlying provision/transaction.
Later information may provide evidence relevant to impairment conditions existing at year-end.
Post-year-end defaults or settlements can provide evidence about credit risk existing at year-end.
Post-year-end selling prices can provide evidence about inventory NRV at year-end.
Events may provide evidence affecting estimates or conditions existing at year-end.
Events after year-end can interact with held-for-sale and disposal assessments depending on when conditions arose.
- Underline the reporting date.
- Underline the authorisation date if IAS 10 is involved.
- Build the timeline. Put the underlying event, reporting date, subsequent event and authorisation date in order.
- Identify the obligation/condition at year-end.
- Apply IAS 37 — present obligation, probable outflow, reliable estimate.
- Classify the item — provision, contingent liability or contingent asset.
- Apply measurement — best estimate, expected value/most likely outcome, discounting and reimbursements where relevant.
- Then apply IAS 10 to information/events arising before authorisation.
- Decide adjusting vs non-adjusting.
- Finish with presentation/disclosure and going-concern consequences.
Issue → Relevant principle → Apply facts → Accounting treatment → Amount/measurement → Journal entry if required → Disclosure → Conclusion.
Mini worked example
Show answer
IAS 10: The February court decision provides additional evidence about the obligation and its amount at 31 December. It is an adjusting event.
Measurement: The year-end provision should reflect the best estimate based on the information available, including the adjusting-event evidence obtained before authorisation.
Intention alone does not create a present obligation.
Wrong. Ask whether it provides evidence of a condition existing at year-end.
Probability is only one recognition criterion. You still need a present obligation and reliable estimate.
Contingent assets are not recognised merely because an inflow is possible.
Expected future operating losses do not create a present obligation.
Consider the time value of money where the effect is material.
An IAS 10 event can affect the basis on which the financial statements are prepared.
IAS 10 applies to the period up to authorisation for issue, not indefinitely after year-end.
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- IAS 37 = provisions / contingent liabilities / contingent assets.
- Provision requires present obligation + probable outflow + reliable estimate.
- Present obligation can be legal or constructive.
- Past event must have created the obligation.
- Best estimate at reporting date.
- Expected value for large populations where appropriate.
- Most likely outcome may be starting point for single obligation.
- Discount when time value of money is material.
- Reimbursement is assessed separately.
- Future operating losses are not provisions.
- Onerous contract → provision when unavoidable costs exceed benefits.
- Restructuring = Level 2 in IAC 2027 PoE.
- Contingent liability generally disclosed, not recognised.
- Contingent asset not recognised merely because inflow is possible.
- IAS 10 period = reporting date to authorisation for issue.
- Adjusting event = evidence of condition existing at year-end.
- Non-adjusting = condition arose after year-end.
- Material non-adjusting events may require disclosure.
- Going concern can change basis of preparation.
- Later evidence about a year-end IAS 37 obligation can be adjusting.
- Always build a timeline.