Picture a certainty spectrum. Trade payables are at one end. Both the amount and the date are known. Accrued wages are known to within rupees. Keep walking and you reach warranties on products already sold, where the obligation is certain in aggregate and the amount can be estimated. Further on is a lawsuit that's half-lost, where the obligation is disputed, and then a tax demand under appeal, where the company denies it owes anything. Accounting draws two lines on this spectrum. One is provide, meaning recognize the liability and the expense now. The other is disclose, meaning put it in a note. The two frameworks draw those lines in different places.
When is a provision recognised, and how is it measured?
IAS 37 / Ind AS 37 are converged, and they recognize a provision only when all three of these hold:
- A present obligation, legal or constructive, from a past event. An obligation is constructive when the company's own conduct, such as a published refund policy or an announced restructuring, has created a valid expectation in others. US GAAP has no general constructive-obligation concept, which is one reason IFRS provides earlier.
- Outflow is probable: more likely than not (> 50%).
- A reliable estimate can be made. The standard says failing this test is rare.
You measure the provision at the best estimate on the balance-sheet date. For warranties and other large populations of similar items, you probability-weight the outcomes to get the expected value. For a single obligation, like one lawsuit, you book the most likely outcome, adjusted for skew. Discount when the time effect is material, and unwind the discount through finance cost each year. A decommissioning provision generates interest expense this way for decades. You met its asset side as site restoration (ARO) on the Ind AS 16 page. Re-measure at every reporting date. Reversals go back through the same P&L line that created them.
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How does US GAAP differ from IFRS on contingencies?
US GAAP's ASC 450 sorts a loss contingency into three buckets, using three words:
- Probable means "likely to occur." In practice that's a materially higher bar than IFRS's >50%, and auditors often behave as if it means ~75–80%. Accrue if the loss is reasonably estimable, and disclose what isn't.
- Reasonably possible covers everything between remote and likely. There's no accrual. You disclose the nature and the estimate or range, or say it can't be estimated.
- Remote generally means nothing at all, apart from certain guarantees.
The same facts can give different numbers under the two frameworks:
| Fact pattern | IAS 37 / Ind AS 37 | ASC 450 |
|---|---|---|
| Single lawsuit, 60% chance of losing ₹50 crore | Probable (>50%) → provide ~₹50 crore (most likely outcome) | 60% typically below "probable" → often no accrual, disclosure only |
| Loss probable; range $100–300m, all points equally likely | Best estimate of a flat range → midpoint $200m | Accrue the low end $100m when no point is better than another |
Look at the lawsuit row. IFRS books ₹50 crore of expense and US GAAP books a footnote. So when you compare litigation exposure across borders, you need the notes as well as the balance sheet. US pharma and tobacco exposure famously stays in disclosure for years before it reaches the balance sheet. Johnson & Johnson's talc litigation is the living classic, with billions accrued once the loss was probable and estimable and far larger amounts described as reasonably possible (pull a recent 10-K). Contingent assets mirror all this with extra conservatism. IFRS discloses them when an inflow is probable and recognizes them only when it's virtually certain. US GAAP recognizes gain contingencies essentially only when they're realized.
What does the contingent liabilities note show?
The Indian contingent-liabilities note deserves ten minutes of your life. A contingent liability is a possible obligation, or a present one that fails the probable or estimable tests. It stays off the balance sheet but gets disclosed. In India this note matters a great deal. Open almost any large Indian annual report, whether it's Maruti Suzuki, ITC, L&T or any bank, and "Contingent liabilities and commitments" lists disputed income-tax, GST/excise, customs and stamp-duty demands. These often run to thousands of crore, stacked up India's appellate ladder. It runs from the Assessing Officer to CIT(A) and ITAT, then to the High Court and finally the Supreme Court. Alongside them you'll find bank guarantees, letters of credit, EPCG export obligations and guarantees for group companies. Read that last one next to the related-party note.
Why does it matter so much? Because this note is the pipeline of possible balance-sheet damage. The teaching case is AGR, adjusted gross revenue. For years, telecom operators disclosed the government's licence-fee claims as contingent. Then in October 2019 the Supreme Court ruled for the government, and the contingency crystallized. For Vodafone Idea alone, that meant a demand on the order of ₹58,000 crore (check against filings), and it has defined the company's solvency ever since. Here's the analyst drill. (1) Compute contingent liabilities ÷ net worth. (2) Track the 3–5 year trend. (3) Check concentration, because one giant dispute is a different risk from 400 small ones. (4) Read management's assessment and any auditor emphasis-of-matter. A ratio drifting past ~50% of net worth, concentrated in one matter, belongs on your Question-4 list.
Onerous contracts and restructuring provisions
Onerous contracts come next. Say a contract's unavoidable costs exceed its expected benefits. A shipping company might be locked into above-market charters, or a fixed-price supply deal might have gone wrong. IAS 37/Ind AS 37 then require a provision at the lower of the cost of fulfilling it and the penalty for exiting it. Since 2022, fulfilment costs include incremental costs plus an allocation of directly related costs. US GAAP has no general onerous-contract standard. Outside specific areas, losses surface only as they're incurred or through asset impairment. So IFRS books bad-contract pain earlier, and in one lump.
Restructuring provisions give you a preview of the big bath. IAS 37 allows a restructuring provision only when a detailed formal plan exists and the company has raised a valid expectation in the people affected, which means it has announced the plan or begun it. Only direct, incremental costs qualify. Future operating losses never qualify. Neither do retraining or relocating staff who are staying. US GAAP (ASC 420) is later and piecemeal. One-time termination benefits are booked when they're communicated, and contract-exit costs when the contract is terminated. Leased offices the company walks away from show up as ROU impairments, not onerous provisions. That's how Meta's 2022–23 restructuring flowed through a US GAAP P&L, with its billions of severance and office-consolidation charges (illustrative; pull the 10-K).
Phase 2 turns this into a weapon, so here's the preview. Restructuring charges are management's favorite place to over-provide in a year that's already terrible ("the year is lost: kitchen-sink it"). Later the excess gets released into future profits, with as little noise as possible. You catch it in the provisions roll-forward note, which shows the opening balance, additions, amounts used, amounts reversed and the closing balance. Large reversals mean past expenses were overstated and current profits are flattered. Read this table in every filing from now on. The earnings games module gives it the full forensic treatment.
Journal entries for a provision
The entries are short. To create a provision, Dr Expense · Cr Provision. To use it, Dr Provision · Cr Cash. To reverse it, Dr Provision · Cr Expense, and notice that's the same P&L line, which is how releases flatter operating margins. To unwind the discount, Dr Finance cost · Cr Provision.