Overview
A provision is recognised when:
- The entity has a present obligation (legal or constructive) as a result of a past event.
- It is probable an outflow of resources embodying economic benefits will be required to settle the obligation.
- The amount can be measured reliably.
Otherwise, a contingent liability is disclosed (unless the possibility of outflow is remote).
A contingent asset is disclosed when an inflow of economic benefits is probable but not virtually certain; if virtually certain, the asset is recognised.
Required first reads
doctrine/accounting-finance-doctrine.mddoctrine/references/ifrs-for-smes-default.md(Section 21)doctrine/references/full-ifrs-overlay.md(IAS 37)
Measurement
Best estimate of the expenditure required to settle the present obligation at the reporting date. For a large population (e.g. warranties), the expected-value method. For a single obligation, the most-likely-outcome method (potentially adjusted for skewness).
Provisions discounted to present value where the effect is material and a reliable discount rate is available.
Common provisions
- Warranty obligations.
- Restructuring (announced before reporting date with detailed plan).
- Onerous contracts (unavoidable costs > expected economic benefits).
- Decommissioning, restoration, environmental remediation.
- Legal claims (probable settlement).
- Customer refunds (where return policy is constructive obligation).
Contingent liabilities — disclosure only
- Possible obligations confirmed only by uncertain future events.
- Present obligations not recognised because outflow not probable or amount not reliably measurable.
Disclosure: nature, estimate of effect, uncertainties, possibility of reimbursement (where applicable).
Build implications
- Provisions register: nature, opening balance, additions, utilisations, reversals, closing.
- Quarterly review by Controller; reviewer sign-off.
- Recognition checklist applied to each candidate item.
- Disclosure note generator with movements table.
- Contingent register: separate from provisions register.
CoA implications
| Code | Name |
|---|---|
| 2500 Provisions — Short-term | Current. |
| 2900 Provisions — Long-term | Non-current. |
| 6850 Provision Movement | P&L. |
| 6860 Unwinding of Discount on Provisions | P&L (finance cost). |
Forbidden patterns
- Provision recognised without a present obligation (blocker — common error: provisioning for future operating losses).
- "Smoothing" provisions (blocker).
- General provisions not tied to specific obligations (major).
- Contingent liabilities recognised as provisions (blocker).
- Contingent assets recognised before virtually certain (blocker).
Files
SKILL.md.references/recognition-decision-tree.md.references/onerous-contract-test.md.
Last reviewed: 2026-05-12. Next review due: 2026-11-12.