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 Retail
Retail entities present a distinctive IAS 37 provision profile driven by high transaction volumes, extensive store networks, and direct consumer relationships. The most common provision type — customer returns and refunds — sits at the intersection of IAS 37 and IFRS 15. Under IFRS 15.B20-B27, a retailer recognises a refund liability (similar to a provision) and a corresponding return asset for the right to recover products from customers. While technically under IFRS 15 rather than IAS 37, the estimation methodology is identical: the expected value method applied to historical return rates. Store closure restructuring provisions are the second most significant category, arising when retailers rationalise underperforming locations. These programmes trigger multiple provision components: employee termination payments, lease exit costs, and make-good obligations for leased premises. Lease reinstatement provisions deserve particular attention because they are recognised at the point of modifying the premises, not at lease end, and must be discounted to present value when the remaining lease term is significant.
Measurement Considerations for Retail
Customer return provisions in retail require the expected value method because they involve large populations of transactions with predictable return patterns. Historical return rates segmented by product category, season, and sales channel provide the basis for estimation. Online sales typically show return rates 2-4 times higher than in-store purchases, making channel segmentation essential. The provision should be measured net of the return asset — the expected recovery value of returned products. Seasonal spikes (post-Christmas returns, post-Black Friday returns) create temporary increases in the provision that should be reflected in interim financial statements. Gift card breakage — the portion of gift cards expected never to be redeemed — is recognised as revenue under IFRS 15, not as a provision reversal. Loyalty programme obligations may superficially resemble provisions but are typically contract liabilities under IFRS 15.B39-B40 representing deferred revenue allocated to the loyalty points performance obligation.
Regulatory Context and Audit Considerations
Retail restructuring provisions are subject to particularly rigorous scrutiny under IAS 37.70-83 because store closure programmes are highly visible public events. The requirement that a valid expectation must be raised in those affected means that announcing a closure programme to employees and customers creates the constructive obligation — the board decision alone does not suffice. Auditors should verify that the restructuring provision includes only direct expenditures necessarily entailed by the restructuring: severance payments, lease termination penalties, and asset write-downs. Costs of ongoing activities — retraining staff redeployed to other stores, marketing to redirect customers to remaining locations, and investment in online platforms — cannot be included even if they are incurred as a consequence of the restructuring decision.
Common Provision Types in Retail
Customer return and refund obligations — cross-reference IFRS 15.B20-B27 for return asset recognition alongside the refund liability
Store closure programmes including lease exit costs, employee termination payments, and make-good obligations for leased premises
Obligation to restore leased retail premises to original condition at lease end — strip-out of fit-outs, fixtures, and modifications
Product warranty provisions for own-brand goods — manufacturer warranty pass-through for third-party brands
Product safety recalls, consumer protection penalties, data privacy fines (GDPR)
Worked Example: NordStyle Retail Group
NordStyle operates 85 fashion retail stores and an online shop. Management is closing 12 underperforming stores. For each store, the following costs are estimated:
| Outcome | Probability | Amount |
|---|---|---|
| Employee severance (avg 8 staff per store) | 100% | €35.000 |
| Lease exit penalty (avg remaining term 2.5 years) | 100% | €62.000 |
| Make-good / reinstatement per store | 100% | €28.000 |
Per-store restructuring cost = €35,000 + €62,000 + €28,000 = €125,000. Total provision for 12 stores = €1,500,000. This assumes a detailed formal plan exists, has been approved by the board, and the main features have been communicated to affected employees and communicated to landlords. The provision excludes retraining costs for staff redeployed to remaining stores and marketing costs to redirect customers.