Key Takeaways
- A board decision alone does not create a restructuring provision; the entity must also have communicated the plan to those affected before the reporting date.
- IAS 37.80 limits the provision to direct expenditures necessarily caused by the restructuring, excluding retraining, relocation, and ongoing operating costs.
- Redundancy payments, lease termination penalties, and asset write-downs are the three most common cost categories included.
- Misstating the timing of recognition (too early or too late) directly affects reported profit in the period the restructuring is announced.
What is Restructuring Provision?
IAS 37.70 defines a restructuring as a programme planned and controlled by management that materially changes either the scope of a business undertaken by an entity or the manner in which that business is conducted. Common examples include selling or terminating a line of business, closing business locations, and restructuring management layers. IAS 37.72 sets a two-part gate before any constructive obligation exists. First, the entity needs a detailed formal plan identifying, at minimum, the business concerned, the principal locations affected, the approximate number of employees who will be compensated for termination, the expenditures to be undertaken, and the timeline. Second, the entity must have raised a valid expectation in those affected that it will carry out the restructuring (by starting to implement the plan or by announcing its main features to those affected).
The measurement rule at IAS 37.80 is deliberately restrictive. Only direct expenditures arising necessarily from the restructuring qualify for inclusion. Retraining costs for staff who are staying, marketing costs for new markets, and investment in new systems fall outside the provision. ISA 540.13(a) requires the auditor to evaluate whether the entity's method for the accounting estimate is appropriate, which means testing each line item in the restructuring cost schedule against the IAS 37.80 filter.
Worked example: Henriksen Shipping A/S
Client: Danish maritime logistics company, FY2025, revenue EUR 140M, IFRS reporter. In October 2025, Henriksen's board approves a plan to close its Hamburg container-forwarding office (85 employees) and consolidate operations into its Copenhagen headquarters. The closure will take place by Q3 2026.
Step 1 — Confirm a detailed formal plan exists
The board resolution dated 12 October 2025 identifies the Hamburg office as the affected location, lists 85 employees to be terminated, estimates redundancy costs of EUR 3.6M (based on German statutory severance plus Henriksen's established severance policy), lease termination costs of EUR 0.8M (contractual early-exit penalty on the Hamburg office lease), and IT decommissioning costs of EUR 0.3M. Total estimated cost: EUR 4.7M.
Step 2 — Confirm a valid expectation has been raised
On 28 October 2025, Henriksen issued a formal notification to all Hamburg staff and initiated consultations with the local works council (Betriebsrat) in accordance with German law. By 31 December 2025, negotiations on the social plan (Sozialplan) are under way.
Step 3 — Test the cost categories against IAS 37.80
Redundancy (EUR 3.6M) is a direct cost necessarily caused by the restructuring. Lease termination (EUR 0.8M) is a contractual penalty triggered by the closure. IT decommissioning (EUR 0.3M) covers dismantling server infrastructure specific to the Hamburg office. All three qualify. Management also included EUR 0.2M for relocating four senior managers to Copenhagen. IAS 37.81 explicitly excludes relocation costs. Remove the EUR 0.2M.
Step 4 — Finalise measurement
Adjusted provision: EUR 4.5M (EUR 4.7M less EUR 0.2M relocation). Settlement is expected within 12 months. The time value of money is not material at this horizon. No discounting is required.
Henriksen recognises a restructuring provision of EUR 4.5M at 31 December 2025 because IAS 37.72 conditions are both met before the reporting date, the cost schedule survives the IAS 37.80 filter after removing the excluded relocation cost, and the estimate is traceable to contractual terms and payroll data.
Why it matters in practice
Teams frequently include future operating losses of the restructured unit in the provision. IAS 37.74 explicitly prohibits this, even if the losses are directly attributable to the restructuring decision. The prohibition extends to losses expected during the wind-down period before the closure date. The auditor should test the cost schedule line by line against IAS 37.80 rather than accepting management's total at face value.
Practitioners sometimes treat the board resolution date as the recognition trigger, ignoring the communication requirement. IAS 37.72(b) requires that a valid expectation has been raised in those affected. A confidential board decision that has not been communicated by the reporting date does not create a constructive obligation, regardless of how detailed the underlying plan is.
Restructuring provision vs. general provision (IAS 37)
| Dimension | Restructuring provision | General provision |
|---|---|---|
| Additional recognition gate | Must satisfy IAS 37.72 (detailed formal plan plus valid expectation in those affected) | Standard IAS 37.14 criteria only (present obligation, probable outflow, reliable estimate) |
| Permitted cost categories | Restricted to direct expenditures necessarily caused by the restructuring (IAS 37.80); future operating losses and retraining excluded | No category restriction beyond the general measurement rules of IAS 37.36–47 |
| Typical triggers | Facility closures, line-of-business terminations, management layer changes, merger integration programmes | Litigation settlements, warranty claims, environmental remediation, onerous contracts |
| Communication requirement | Entity must have communicated to those affected before the reporting date | No specific communication requirement; the obligating event itself creates the obligation |
| Common audit error | Including excluded costs (relocation, retraining, future operating losses) in the provision | Omitting the discount when the settlement horizon exceeds 12 months |
The additional IAS 37.72 gate exists because restructuring decisions are internal. Unlike a warranty claim (where the obligating event is external), a restructuring obligation depends entirely on what the entity has decided and communicated. The stricter test prevents entities from creating provisions through board resolutions alone and managing earnings by timing the recognition.
Related terms
Frequently asked questions
Can I recognise a restructuring provision before the reporting date if the announcement happens after year-end?
No. IAS 37.75 states that if the entity starts implementation or announces the plan only after the reporting date, no provision is recognised at that date. IAS 10.22(b) may require disclosure of the restructuring as a non-adjusting event if it is material. The provision appears in the financial statements of the period in which the IAS 37.72 conditions are first met.
What costs are excluded from a restructuring provision?
IAS 37.81 excludes retraining or relocating continuing staff, marketing costs, and investment in new systems or distribution networks. These are future operating costs of the business in its new form, not costs caused by the restructuring itself. The auditor tests each line item against the IAS 37.80 criterion: is this expenditure necessarily entailed by the restructuring and not associated with the ongoing activities of the entity?
Does a restructuring provision require discounting?
Only when the effect of the time value of money is material, per IAS 37.45. If the restructuring will be completed within 12 months and the discount effect is immaterial, the entity measures the provision at its undiscounted amount. For multi-year restructuring programmes where payments extend beyond two or three years, the auditor should verify whether discounting has been applied and whether the pre-tax discount rate reflects current market conditions.