PAS 37: Provisions, Contingent Liabilities, and Contingent Assets
🎯 Objective
The objective of PAS 37 is to ensure that:
Appropriate recognition criteria and measurement bases are applied to provisions, contingent liabilities,
and contingent assets.
There is adequate disclosure to help users understand their nature, timing, and amount.
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📌 Key Definitions
🔹 Provision
A liability of uncertain timing or amount.
> Example: Estimated cost of repairing defective products under warranty.
🔹 Liability
A present obligation as a result of past events, settlement of which is expected to result in an outflow of
resources.
🔹 Contingent Liability
A possible obligation arising from past events:
Whose existence will be confirmed only by future events not wholly within the entity’s control, or
A present obligation that is not recognized because it is not probable or cannot be measured reliably.
🔹 Contingent Asset
A possible asset arising from past events, confirmed by future events not wholly within the entity’s
control.
> Example: A pending court case that may result in economic gain.
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📝 When to Recognize a Provision?
A provision is recognized only when all three of the following criteria are met:
1. There is a present obligation (legal or constructive) from a past event.
2. It is probable (more likely than not) that an outflow of resources will be required to settle the
obligation.
3. The amount can be reliably estimated.
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🔍 Present Obligation
Legal obligation: From laws or contracts (e.g., fines, warranties).
Constructive obligation: From past practices or public commitments that create a valid expectation (e.g.,
refund policies).
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💰 Measurement of Provisions
Measured at the best estimate of the expenditure required to settle the obligation.
If timing is a factor, discount the provision to present value.
Review provisions at each reporting date and adjust if necessary.
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🚫 What is Not a Provision?
Future operating losses ❌
General or uncertain risks without a present obligation ❌
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📋 Contingent Liabilities and Assets: Recognition & Disclosure
Item Recognize? Disclose?
Provision ✅ Yes ✅ Yes
Contingent Liability ❌ No ✅ Yes (unless remote)
Contingent Asset ❌ No ✅ Yes (if probable); ❌ No if remote
> 🚫 Contingent assets are never recognized in the FS until the realization is virtually certain, in which
case it becomes a regular asset.
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📌 Examples
✅ Provision
A company gives a one-year warranty on its products. Based on past experience, it knows some
products will need repairs. A provision should be recognized for expected warranty costs.
❌ Contingent Liability
A company is being sued for damages. Its lawyers say the chances of losing are possible but not
probable. A liability is not recognized, but the case must be disclosed.
⚠️Contingent Asset
The company filed a lawsuit expected to result in a favorable judgment. The gain is possible but not
certain. No asset is recognized, but disclosure is required.
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📣 Disclosures Required
Description of the nature of the obligation
Expected timing and uncertainties
Amount and changes during the period
Reimbursement rights (e.g., insurance recoveries)
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📌 Summary Table
Type Recognized in FS? Disclosed in Notes?
Provision ✅ Yes ✅ Yes
Contingent Liability ❌ No ✅ Yes
Contingent Asset ❌ No ✅ Yes (if probable)
