IAS 37 Definition of Restructuring: A program that is planned and controlled by management, and materially changes either:Psychological risk

  1. The scope of an entity’s activities; or
  2. The manner in which those activities are carried out.

Restructure costs are recognized as soon as there is a present obligation (legal or constructive) resulting from a past event, and a reliable estimate of costs can be made. Restructurings are rarely conducted for legal reasons. Therefore, determining whether a constructive obligation exists is the key challenge for deciding when to record a restructuring provision. This challenge is stipulated in IAS 37 72 as follows:

A constructive obligation to restructure arises only when an entity:

  1. has a detailed formal plan for the restructuring identifying at least:
    1. the business or part of a business concerned;
    2. the principal locations affected;
    3. the location, function, and approximate number of employees who will be compensated for terminating their services;
    4. the expenditures that will be undertaken; and
    5. when the plan will be implemented; and
  2. has raised a valid expectation in those affected that it will carry out the restructuring by starting to implement that plan or announcing its main features to those affected by it.

Given the level of judgment involved, companies should develop processes and controls to support their determination of whether a constructive obligation exists.


The announcement needs to be sufficiently detailed to create an expectation for those affected that the plan will be implemented.

This includes information about the impacted businesses, the estimated timing, functions and approximate number of employees affected. However, neither the estimated cost nor the specific individuals affected (e.g. employees, vendors) needs to be announced.


Implementation should commence as soon as practicable and be completed in a time-frame such that significant changes to the plan would not be expected.

While there is no specified limit on the timing, we believe the time-frame needs to be short enough that the possibility of the plan being changed is small.

Board decisions

Usually, a management or board decision approving a restructuring does not in itself establish a constructive obligation. This is because an expectation cannot be created until those affected are made aware of the plan.

Exceptions may occur, for example when the board decision requires prior communication with or approval from employee representatives – e.g. communications with unions or a working council or announcement of the restructuring through the filing of some kind of document required by law or other rules in a certain country.

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The requirements and considerations above apply to all restructuring costs other than employee termination benefits.

Measurement of a restructuring provision

Only incremental costs that are directly associated with the restructuring should be included in the provision. Additionally, IFRS prohibits the recognition of a provision for costs associated with ongoing activities, such as the cost of training or relocating continuing staff.

As a result, companies should carefully analyze their restructuring costs. Once the nature of the restructuring costs has been identified, the provision is measured at the best estimate of the anticipated costs. That amount is discounted using a pre-tax rate that reflects both the time value of money and risks specific to the liability, if the financing component is material.

Employee termination benefits

Employee termination benefits are provided in exchange for the termination of an individual’s employment, outside of normal retirement. While termination benefits represent one of the most common types of restructuring costs, they can also be payable outside of a restructuring program. Employee termination benefits are in the scope of IAS 19 rather than IAS 37.

Employee benefits payable as a result of either:

  1. An entity’s decision to terminate an employee’s employment before the normal retirement date; or
  2. An employee’s decision to accept voluntary redundancy in exchange for those benefits.



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