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 Nonprofits
Nonprofit organisations face a distinctive IAS 37 provision landscape shaped by their reliance on grant funding, regulatory accountability requirements, and the unique stakeholder relationships inherent in mission-driven operations. Grant clawback provisions are among the most significant nonprofit-specific IAS 37 items: when a nonprofit receives conditional grant funding and there is doubt about meeting all conditions, a provision may be required for the portion of funding at risk of repayment. This differs from the initial recognition question under IAS 20 (Government Grants) — it arises when conditions are not fully met and a repayment obligation becomes probable. Restructuring provisions in nonprofits often follow funding cuts, requiring careful application of IAS 37.70-83's dual criteria: the formal plan must identify affected programmes, staff, and locations, and those affected must be informed. For nonprofits operating from donated or government-provided premises, lease reinstatement obligations create provisions similar to those in the commercial sector.
Measurement Considerations for Nonprofits
Grant clawback provisions require assessment of whether the nonprofit is meeting the conditions attached to each significant grant. If conditions are partially unmet and a clawback is probable, the provision should be measured at the amount the funder is entitled to recover. This may be the full grant amount if conditions are entirely unmet, or a proportionate amount if performance has been partial. The probability assessment should consider the funder's track record of enforcing clawback provisions, the nature of the unmet conditions (financial vs. programme delivery), and any ongoing discussions with the funder about remediation. For employment-related provisions, nonprofit restructuring often involves programme staff on fixed-term contracts linked to project funding — when funding ends and contracts are not renewed, termination provisions may be required for notice periods, accrued leave, and any redundancy entitlements under local employment law.
Regulatory Context and Audit Considerations
Nonprofit regulatory frameworks vary significantly by jurisdiction and legal form. In the EU, foundations (stichtingen) and associations (verenigingen) are subject to national charity regulation. Grant funders — whether government agencies, EU institutions, or private foundations — each have their own conditions and enforcement mechanisms for clawback. Auditors of nonprofits should evaluate whether management has identified all material grants with unmet conditions and assessed the probability of clawback. Safeguarding provisions are a growing category for nonprofits working with vulnerable populations — legal claims arising from safeguarding failures can be significant and long-tail.
Common Provision Types in Nonprofits
Claims from beneficiaries, donors, or regulators — employment disputes, safeguarding failures, contractual disputes with partners
Programme closures, staff redundancies driven by funding cuts, office consolidation
Onerous lease provisions for premises that are no longer needed or used
Make-good obligations on donated, leased, or government-provided premises
Grant clawback obligations for failure to meet programme conditions or spending requirements
Worked Example: European Development Foundation
A nonprofit received a €500,000 EU grant for a 3-year education programme. At the reporting date, programme delivery is behind schedule and two conditions are at risk of not being met. Management estimates a 55% probability of partial clawback:
| Outcome | Probability | Amount |
|---|---|---|
| Full conditions met — no clawback | 45% | €0 |
| Partial clawback — 30% of grant | 40% | €150.000 |
| Significant clawback — 60% of grant | 15% | €300.000 |
Expected value = (45% × €0) + (40% × €150,000) + (15% × €300,000) = €0 + €60,000 + €45,000 = €105,000. The probability of some outflow exceeds 50% (55% combined probability of clawback), so recognition as a provision is required. Alternatively, using the single most likely outcome: partial clawback of €150,000 (40% probability is the most likely individual outcome). Given the skew toward lower outcomes, the expected value of €105,000 may be more appropriate.