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This article has been updated in October 2026 to reflect the decisions the IASB has made in response to the feedback received on its 2024 proposals to amend IAS 37. The related guide has not been updated and reflects the original proposals only.
Highlights
With companies facing ongoing uncertainties and complexities, accounting for provisions – particularly when to recognise a provision and at what amount – has come to the fore.
In 2024, the International Accounting Standards Board (IASB) issued proposals to revise IAS 37 Provisions, Contingent Liabilities and Contingent Assets*. These proposals could result in a company recognising provisions earlier and for larger amounts.
In response to feedback on the proposal to withdraw IFRIC 21 Levies, the IASB has decided to introduce specific guidance for levies in IAS 37. It has also clarified how the 2024 measurement proposals would apply.
The IASB is planning to release the final amendments in the first half of 2027, so companies need to get ready for the forthcoming changes.
When do you recognise a provision?
One of the challenging questions in applying IAS 37 is when to recognise a provision – specifically, how a company determines if it has a present obligation and what a ‘past event’ is. These questions became more prominent with the rise of climate-related commitments and threshold-based obligations.
The proposals to amend IAS 37 include:
- three new tests to determine whether a present obligation exists; and
- specific guidance for threshold-based obligations.
What does this mean for companies? The impacts of these changes could be significant for some, depending on the nature of their obligations and existing accounting policies.
Under the proposals, companies may need to start recognising some provisions sooner and over time. New judgements may be required.
Will IAS 37 provide specific guidance for levies?
Yes, IAS 37 will provide specific guidance for levies. The guidance will explain how to apply the three new tests and will differ from IFRIC 21.
Under the new guidance, the timing of recognition for some levies – especially those that are payable only if multiple conditions or thresholds are met – may change. At present, a company recognises such a levy only when the last activity occurs. Under the new guidance, it would need to apply judgement to determine which activity the government is seeking to levy. The timing of that activity would drive the timing of recognition for the levy.
Which costs do you include in measuring a provision?
IAS 37 provides no specific guidance on which costs to include in measuring a provision. Therefore, companies’ approaches vary depending on the nature of the provision and their accounting policy.
Based on the feedback received on the proposals, the IASB clarified that a company would measure a provision depending on how it would settle the obligation.
- For obligations to transfer cash only (e.g. to settle a legal claim), a company would include the cash amount.
- For obligations to transfer goods or services (e.g. to engage a third party to perform decommissioning works), a company would include all direct costs, comprising:
- incremental costs; and
- an allocation of other costs that relate directly to settling the obligation.
This may result in some provisions becoming larger.
Which discount rate do you use when discounting a long-term provision?
In applying IAS 37, the approach to determining the discount rate for long-term provisions varies between companies – i.e. some use a risk-free rate; others adjust the rate for non-performance or their own credit risk.
Based on the feedback received on the proposals, the IASB will proceed with the proposed requirement to use a risk-free discount rate when measuring a long-term provision. Depending on the company’s current accounting policy, some provisions may become larger.
What’s next?
The IASB is planning to release the final amendments in the first half of 2027, so companies need to get ready for the forthcoming changes.
*Read our comment letter (PDF 223 KB).
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