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 Transportation
Transportation and logistics companies carry provision portfolios shaped by high-value physical assets, environmental obligations, and passenger service regulations. Decommissioning provisions for old vessels, aircraft, and rolling stock are increasingly significant as environmental regulations tighten around end-of-life asset disposal. Environmental provisions cover fuel spill remediation, emission quota shortfalls, and contamination at terminals and depots. Passenger compensation provisions under EU Regulation 261/2004 (EU261) represent a unique, high-volume provision category for airlines: standardised compensation amounts (€250-€600 per passenger depending on flight distance) applied to delayed or cancelled flights create an expected value calculation across large passenger populations. Onerous route provisions arise when transportation operators are required to maintain unprofitable services under regulatory licences or public service obligations.
Measurement Considerations for Transportation
EU261 passenger compensation provisions are well-suited to the expected value method because they involve large passenger populations with statistically predictable disruption patterns. Airlines should estimate the number of flights expected to trigger compensation obligations, the average number of affected passengers, and the applicable compensation amount by flight distance category. Historical disruption data (delays, cancellations) segmented by route, season, and cause provides the basis. Decommissioning provisions for vessels and aircraft should follow the same methodology as energy sector decommissioning: engineering estimates of removal and disposal costs at current prices, discounted to present value over the remaining useful life. Fleet lease return provisions require assessment of the cost to return leased assets in the condition specified by the lease agreement — for aircraft, this typically involves maintenance reserves for engine overhauls and airframe checks.
Regulatory Context and Audit Considerations
EU261 creates statutory passenger compensation obligations that meet all IAS 37 recognition criteria. The IMO (International Maritime Organization) and ICAO (International Civil Aviation Organization) set environmental standards that create obligations for vessel and aircraft operators. National transport regulators may impose public service obligations that create onerous route provisions. The EU Ship Recycling Regulation and Basel Convention govern vessel decommissioning. Auditors should verify that transportation companies have identified all material regulatory obligations that give rise to provisions.
Common Provision Types in Transportation
Fuel spill remediation, emission penalties, environmental compliance costs for shipping and aviation
Decommissioning of old vessels, aircraft, rolling stock — increasingly regulated for environmental compliance
Onerous route provisions for unprofitable routes with service obligations (regulated transport)
Passenger compensation claims (EU261), cargo damage claims, personal injury
Fleet return conditions for leased vehicles, aircraft, or vessels — maintenance condition requirements
Worked Example: EuroWings Regional Airlines
An airline operates 15,000 flights per year. Historical data shows that 4.5% of flights trigger EU261 compensation obligations. Average affected passengers per qualifying flight is 85, with an average compensation of €380 per passenger:
Qualifying flights: 15,000 × 4.5% = 675 flights. Average passengers affected per qualifying flight: 85. Total passenger claims: 675 × 85 = 57,375 claims. Average compensation per claim: €380. Total EU261 provision = 57,375 × €380 = €21,802,500. This provision covers the period's expected compensation obligations. Historical claim rates should be updated seasonally (winter has higher disruption rates).