IAS 37 (as adopted by UK) · FRC

IAS 37 Provision Calculator
United Kingdom

IAS 37 provision assessment with United Kingdom-specific regulatory guidance, FRC expectations, and local legal framework considerations.

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 Application in United Kingdom

The United Kingdom adopted IAS 37 Provisions, Contingent Liabilities and Contingent Assets as part of UK-adopted international accounting standards. Following Brexit, the UK Endorsement Board (UKEB) assumed responsibility for endorsing IFRS standards for use in the UK, and IAS 37 as adopted by the UK remains substantively identical to the IASB-issued version. The Financial Reporting Council (FRC) has published thematic reviews and corporate reporting guidance that shape practical expectations for how UK entities recognise and measure provisions. UK entities must consider the interaction between IAS 37 and the Companies Act 2006, which requires a true and fair view of the entity's liabilities and imposes specific disclosure obligations for contingent liabilities in the directors' report. The FRC Lab has examined provision disclosures and found that many UK entities provide insufficiently specific information about the nature and timing of provisions, the uncertainties affecting the amount, and the basis for measurement. UK entities should pay particular attention to the FRC's expectations regarding the distinction between provisions and contingent liabilities, the use of best estimates versus expected values, and the transparency of significant judgements underpinning provision calculations.

FRC Regulatory Expectations

The FRC has conducted thematic reviews of IAS 37 application across UK-listed entities, focusing on the quality of provision recognition decisions and the adequacy of related disclosures. Key areas of FRC scrutiny include the robustness of the evidence base supporting the probability assessment for recognising provisions, the quality of best estimate calculations and the reasonableness of underlying assumptions, the adequacy of disclosures for material provisions including the nature of the obligation and expected timing of outflows, and the treatment of contingent liabilities where entities frequently provide insufficient disclosure. The FRC's Corporate Reporting Review (CRR) team has written to companies requesting enhanced disclosures for restructuring provisions, legal claim provisions, and decommissioning obligations. The FRC has also expressed concern that some entities reverse provisions without adequate explanation or recognise provisions too late, after the obligating event has clearly occurred. Following major corporate failures, the FRC has intensified its focus on how entities assess whether constructive obligations arise from published policies, established patterns of past practice, or public commitments.

Practical Guidance for United Kingdom

UK entities applying IAS 37 should establish robust processes for identifying and measuring provisions across all obligation types. For legal claims, the assessment of whether an outflow is 'more likely than not' should be informed by external legal counsel opinions, taking account of the specific characteristics of UK litigation including the English costs-shifting rule where the losing party typically pays the winner's costs. For constructive obligations arising from published environmental policies or corporate social responsibility commitments, UK entities should assess whether a valid expectation has been created in the minds of affected parties. The discount rate for long-term provisions should reference UK government bond yields as a pre-tax risk-free rate, adjusted as appropriate for the risks specific to the liability. HMRC guidance on the tax deductibility of provisions is relevant: provisions for legal claims are generally deductible when the liability crystallises, but provisions based on constructive obligations may face challenge from HMRC regarding timing of deduction.

Audit Expectations

The FRC Audit Quality Review (AQR) team has consistently identified provisions as a key audit area requiring enhanced attention. Common inspection findings include insufficient challenge of management's probability assessments for provision recognition, inadequate testing of the completeness of the provision population — particularly unrecorded legal or environmental obligations, limited evaluation of the reasonableness of provision estimates including the discount rate applied to long-term provisions, and failure to assess whether restructuring provisions meet all recognition criteria in IAS 37.72 including the requirement for a detailed formal plan. UK auditors are expected to obtain and evaluate external legal confirmations for material litigation provisions, assess the historical accuracy of prior provision estimates through retrospective review, and consider whether disclosures of contingent liabilities are complete and sufficiently specific to enable users to understand the nature and potential financial impact of unrecognised possible obligations.

United Kingdom-Specific Considerations

UK-specific considerations for IAS 37 include the interaction between provision recognition and the Companies Act 2006 distributable profits framework. Provisions charged to profit or loss reduce realised profits and directly affect distributable reserves, which is particularly significant for restructuring provisions or onerous contract provisions that may be material in amount. UK employment law creates specific obligations relevant to IAS 37: redundancy provisions must consider statutory redundancy payments under the Employment Rights Act 1996 and any enhanced contractual terms, and the obligation typically crystallises when employees are informed of the redundancy programme. Environmental obligations in the UK arise under the Environmental Protection Act 1990, the Contaminated Land regime under Part 2A, and various environmental permitting regulations, which create legal obligations to remediate contaminated land. The UK's Health and Safety at Work Act 1974 can also give rise to provisions for remediation or penalty costs. The Limitation Act 1980 and Limitation Act 1939 set time limits for legal claims which are relevant when assessing the period over which legal claim provisions should be estimated.

Common Audit Inspection Findings — United Kingdom

Provision recognition probability assessment not adequately challenged — auditor accepted management's assertion without evaluating the evidential basis for the 'more likely than not' threshold

Completeness of legal claim provisions not corroborated — auditor relied solely on management representations without obtaining independent legal confirmations

Restructuring provision recognised before all IAS 37.72 criteria were met — no evidence that a detailed formal plan had been communicated to those affected

Discount rate applied to long-term decommissioning provisions not adequately assessed — rate not referenced to pre-tax risk-free rates as required by IAS 37.47

Contingent liability disclosures incomplete — material possible obligations identified in board minutes not disclosed in the financial statements

Frequently Asked Questions — United Kingdom

How is IAS 37 adopted and applied in the UK?
IAS 37 is adopted in the UK through UK-adopted international accounting standards, endorsed by the UK Endorsement Board (UKEB) following Brexit. The standard is substantively identical to the IASB-issued version. All UK entities that report under IFRS, including companies listed on the London Stock Exchange and AIM, must apply IAS 37 for provisions, contingent liabilities, and contingent assets. UK entities reporting under FRS 102 apply Section 21, which is broadly consistent with IAS 37 but has some differences in measurement requirements.
What does the FRC expect regarding provision disclosures?
The FRC expects UK entities to provide entity-specific disclosures that go beyond generic descriptions. For each material class of provision, the FRC expects disclosure of the nature of the obligation, the expected timing of outflows, an indication of the uncertainties about the amount or timing, and the assumptions used in measurement. The FRC has written to companies requesting improved disclosures for restructuring provisions, environmental liabilities, and legal claims. Boilerplate or overly aggregated disclosures are considered insufficient by the FRC's Corporate Reporting Review team.
How does IAS 37 interact with FRS 102 for UK dual reporters?
UK entities preparing consolidated IFRS financial statements may have subsidiaries reporting under FRS 102 (the UK GAAP standard). FRS 102 Section 21 requires provisions to be measured at the best estimate of the amount required to settle the obligation, similar to IAS 37. However, FRS 102 does not require discounting of provisions unless the effect is material, whereas IAS 37 requires discounting when the time value of money is material. Dual reporters should reconcile the differences in provision measurements between the two frameworks.
What are UK-specific provision considerations for environmental obligations?
UK environmental obligations under the Environmental Protection Act 1990 and the Contaminated Land regime (Part 2A of the EPA 1990) create legal obligations that may require provisions under IAS 37. The 'polluter pays' principle applies, and the Environment Agency can issue remediation notices requiring the responsible party to clean up contaminated sites. Entities should consider both current and future regulatory requirements, including obligations arising under the UK Emissions Trading Scheme and environmental permitting regulations. Provisions should cover the full estimated cost of remediation including ongoing monitoring.
What are common FRC audit inspection findings related to provisions?
The FRC AQR has identified recurring deficiencies including: insufficient auditor challenge of management's probability assessment for recognising or not recognising a provision, inadequate assessment of completeness — particularly for legal claims where the auditor did not corroborate management's representation with independent legal evidence, limited testing of the accuracy of provision calculations including discount rates and cash flow assumptions, and failure to evaluate whether restructuring provisions satisfy all of the specific recognition criteria in IAS 37.72 before recognition. The FRC has also criticised auditors for not performing retrospective reviews of prior-year provision estimates.

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