Restructurings Example on recognising and measuring provisions

The Case:

A restructuring is a program that is planned and controlled by management and materially changes either the scope of a business undertaken by an entity or the manner in which that business is conducted.

Present obligation as a result of a past obligating event—a constructive obligation to restructure arises only when an entity:Closure of a division plant

  1. (a) has a detailed formal plan for the restructuring identifying at least: Restructurings
    1. the business or part of a business concerned; Restructurings
    2. the principal locations affected;  Restructurings
    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 Restructurings
    5. when the plan will be implemented; and Restructurings
  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. Restructurings

Conclusion—an entity recognises a provision for restructuring costs only when it has a legal or constructive obligation at the reporting date to carry out the restructuring.


Just to provide the right frame for the case here is a short background of the key features of IAS 37 needed to understand the provisioning for a restructuring.

Key definitions [IAS 37 10]

Provision: a liability of uncertain timing or amount. Refunds policy


  • present obligation as a result of past events Refunds policy
  • settlement is expected to result in an outflow of resources (payment) Refunds policy

Contingent liability:

  • a possible obligation depending on whether some uncertain future event occurs, or Refunds policy
  • a present obligation but payment is not probable or the amount cannot be measured reliably Refunds policy

Recognition of a provision

An entity must recognise a provision if, and only if: [IAS 37 14] Refunds policy

  • a present obligation (legal or constructive) has arisen as a result of a past event (the obligating event), Refunds policy
  • payment is probable (‘more likely than not’), and Refunds policy
  • the amount can be estimated reliably. Refunds policy

An obligating event is an event that creates a legal or constructive obligation and, therefore, results in an entity having no realistic alternative but to settle the obligation. [IAS 37 10]

A constructive obligation arises if past practice creates a valid expectation on the part of a third party, for example, a retail store that has a long-standing policy of allowing customers to return merchandise within, say, a 30-day period. [IAS 37 10] Refunds policy

A possible obligation (a contingent liability) is disclosed but not accrued. However, disclosure is not required if payment is remote. [IAS 37 86] Refunds policy

In rare cases, for example in a lawsuit, it may not be clear whether an entity has a present obligation. In those cases, a past event is deemed to give rise to a present obligation if, taking account of all available evidence, it is more likely than not that a present obligation exists at the balance sheet date. A provision should be recognised for that present obligation if the other recognition criteria described above are met. If it is more likely than not that no present obligation exists, the entity should disclose a contingent liability, unless the possibility of an outflow of resources is remote. [IAS 37 15]

See also: The IFRS Foundation


All of the entities in the examples have 31 December as their reporting date. In all cases, it is assumed that a reliable estimate can be made of any outflows expected. In some examples the circumstances described may have resulted in impairment of the assets; this aspect is not dealt with in the examples. References to ‘best estimate’ are to the present value amount, when the effect of the time value of money is material.