IAS 37 Provisions, Contingent Liabilities and Contingent Assets
IAS 37 sets out when and how companies recognize provisions – liabilities of uncertain timing or amount – and when contingent liabilities and contingent assets are disclosed.
Related Standards
Explanation
A provision is recognized when:
• the company has a present obligation (legal or constructive) as a result of a past event,
• an outflow of resources is probable, and
• the amount can be estimated reliably.
Provisions are measured at the best estimate of the expenditure required to settle the obligation, discounted where the effect is material.
Two applications are especially relevant for revenue contracts:
• Assurance-type warranties, which only assure that a product meets agreed specifications, are accounted for under IAS 37. Service-type warranties are separate performance obligations under IFRS 15.
• Onerous contracts, where the unavoidable costs of meeting the obligations exceed the expected benefits, require a provision.
Why It Matters
Equipment, technology, and medical device businesses often offer both standard and extended warranties. Distinguishing them correctly determines whether a provision is recorded or revenue is deferred – a key design decision in revenue accounting.
Related Terms
Performance Obligation · IFRS 15 · ASC 460 Guarantees · Contract Liability
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