IAS 37 Provisions, Contingent Liabilities and Contingent Assets –
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:

  1. (a) 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.

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.

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.