Obligation Type
Present Obligation
Does a present obligation exist from a past event?
IAS 37 Provision Assessment Toolkit — free PDF
Complete audit toolkit: IAS 37 recognition decision flowchart, measurement methodology guide, discounting worked examples, disclosure checklist, provision type cheat sheet, and journal entry templates.
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IAS 37.14 — A provision shall be recognised when: (a) an entity has a present obligation from a past event; (b) it is probable that an outflow will be required; (c) a reliable estimate can be made.
IAS 37.36 — The amount recognised shall be the best estimate of the expenditure required to settle the present obligation at the end of the reporting period.
IAS 37.39 — Where there is a large population of items, the obligation is estimated by weighting all possible outcomes by their associated probabilities (expected value).
IAS 37.45 — Where the effect of the time value of money is material, the amount of a provision shall be the present value of the expenditures expected to settle the obligation.
IAS 37.72 — A constructive obligation to restructure arises only when an entity has a detailed formal plan and has raised a valid expectation in those affected.
IAS 37 Provisions in Agriculture
Agricultural entities face a provision landscape shaped by environmental regulation, weather and disease uncertainty, and the volatile commodity markets that affect forward contract profitability. Environmental remediation provisions are becoming increasingly significant for agriculture as environmental standards tighten: pesticide contamination of soil and groundwater, nitrogen emissions into waterways, and habitat destruction all create legal obligations under evolving environmental legislation. The EU's Green Deal and Farm to Fork Strategy are accelerating this trend. Decommissioning provisions for agricultural structures — greenhouses, intensive livestock buildings, irrigation infrastructure, and storage facilities — are often long-term obligations that require discounting. Onerous forward crop contracts arise when market price movements make pre-sold harvests loss-making, and livestock disease outbreaks can create compensation obligations where agricultural entities are liable for biosecurity failures.
Measurement Considerations for Agriculture
Environmental provisions for agriculture require specialist environmental assessment to estimate remediation costs. Soil contamination from decades of pesticide use may require excavation, treatment, and monitoring over many years. Water pollution from nitrogen and phosphorus runoff may require installation of buffer zones, treatment systems, and ongoing monitoring. The provision should be measured at the best estimate of total remediation cost, discounted to present value for long-term programmes. Onerous forward crop contract provisions compare the expected revenue under the contract (contracted price × expected yield) with the unavoidable costs of fulfilling the contract (planting, cultivation, harvest, and delivery costs). If the costs exceed the contracted revenue, the difference is provisioned. For livestock disease, provisions arise when an entity has a legal obligation to compensate for disease transmission or to cull and dispose of affected animals.
Regulatory Context and Audit Considerations
Agricultural environmental regulation varies significantly by jurisdiction. In the EU, the Nitrates Directive, Water Framework Directive, and Common Agricultural Policy (CAP) cross-compliance requirements create legal obligations that may give rise to provisions. In the Netherlands, nitrogen regulation (stikstofbeleid) has become particularly significant, with some agricultural operations required to reduce emissions or face penalties. National plant protection product regulations create obligations for remediation of contamination from banned or restricted pesticides. Auditors should evaluate whether agricultural entities have identified all environmental obligations arising from current and historical farming practices.
Common Provision Types in Agriculture
Pesticide contamination remediation, water pollution, soil degradation — increasingly regulated with stricter environmental standards
Decommissioning of farm structures, greenhouses, irrigation systems, storage facilities at end of life or lease end
Forward crop contracts at unfavourable prices when market prices have fallen below contracted selling prices, or input costs have risen
Environmental regulation violations — nitrogen emissions (EU), water usage restrictions, pesticide usage breaches
Livestock disease compensation obligations, crop contamination claims from neighbouring properties, employment disputes
Worked Example: AgriVerde Cooperative
An agricultural cooperative must remediate groundwater contamination from historical pesticide use on a 200-hectare former arable site. Environmental assessment indicates a 10-year remediation programme:
Nominal remediation cost: €1,800,000 (based on environmental engineering assessment). Timing: 10-year programme, weighted average timing of 5 years. Discount rate: 3.0%. Present value = €1,800,000 / (1.03)^5 = €1,800,000 / 1.1593 = €1,552,700. Year 1 unwinding: €1,552,700 × 3.0% = €46,581. The provision is recognised against the cost of the land under IAS 16.16(c) if the contamination arises from acquisition of the site, or through profit and loss if from the entity's own operations.