Constructive obligation

IFRS Definition (main principle):

A constructive obligation is an obligation that derives from an entity’s actions where:

  1. by an established pattern of past practice, published policies or a sufficiently specific current statement, the entity has indicated to other parties that it will accept certain responsibilities; and
  2. as a result, the entity has created a valid expectation on the part of those other parties that it will discharge those responsibilities.

IFRS Database explanation:

This is a definition from IAS 37 Provisions, contingent liabilities and contingent assets.

A legal obligation and a constructive obligation are both present obligations that might cause the event of recognising a provision (see IAS 37 14 Recognition Provisions). Another definition in IAS 37 that is of importance in relation to a legal obligation is a contingent liability.

These three IFRS terms are on a sliding scale regarding the recognition and/or disclosure of certain past events:

A legal obligation is a extremely strong legal case that a reporting entity has to recognise a provision/liability, when all other conditions in IAS 37 14 are met.

A constructive obligation is a strong case not based on law but on past behaviour by a entity towards employees, suppliers, customers or other third parties. A constructive obligation also has to be recognised as a provision/liability by a reporting entity, when all other conditions in IAS 37 14 are met. 

A contingent liability by contrast is an uncertain or potential obligation for which it is clear that it is not a present obligation, but what it exactly is is not certain. A contingent liability has to be considered in reporting off balance sheet contingencies.

Also read: IAS 37 Provisions liabilities and contingent liabilities
What are commitments versus liabilities?
What are contingent liabilities?