Decoding Ind AS 37 | Practical Case Studies on Recognition and Measurement of Provisions

1. Introduction

Provision is a liability of uncertain timing or amount which is set aside in the financial statements to cover a present obligation that has arisen from a past event. Ind AS 37, Provisions, Contingent Liabilities and Contingent Assets, establishes the principles for recognising and measuring provisions, as well as for disclosing contingent liabilities and contingent assets. In order to recognize provision, there should be present obligations arising from past events with probable outflow of resources to settle the obligation, and whose amount can be reliably estimated.

Furthermore, Ind AS 37 promotes transparency and consistency in financial reporting, helping users of financial statements to assess the nature, timing, and uncertainties of potential obligations faced by an entity. Ind AS 37 may appear straightforward, as it simply outlines when and how a provision should be recognised. However, in practical scenarios, its application can be quite challenging. Determining whether a present obligation actually exists, or whether an outflow of resources is probable, often involves significant judgment and interpretation of facts. Some practical scenarios which involves significant subjectivity and dependence on future events are discussed below:

2. Scenario 1

Radiant Private Limited hereinafter referred to as “the company” is engaged in the health care business. On 1st March 2025, the government enacted new legislation mandating that all hospitals shall establish dedicated bio-medical waste treatment units within their premises. Non-compliance could result in penalties. The company still dumps the bio medical waste in its usual dumping zone without construction of specific bio-medical waste treatment unit. As on reporting date i.e 31st March 2025, the company has not yet begun construction and is still evaluating the design and estimated costs. Management estimates that constructing the unit will involve significant expenditure. Whether the company should recognise a provision at year-end for the expected cost of constructing the bio-medical waste treatment unit?

2.1 Analysis

The decision relating to the construction of bio-medical waste treatment unit is wholly within the control of the company. Despite the legislation being enacted before the year-end, it does not impose an immediate obligation to construct the unit. As of the reporting date, no construction activity has begun, and no past event has created a present obligation. Hence, the company shall not recognize any provision in respect of expected cost of the construction of bio-medical waste treatment unit.

However, the company has violated the law by dumping its bio-medical waste in usual dumping zone. Hence, a provision shall be recognised at year-end for the estimated cost of penalties. The recognition of provision for penalty depends upon the probability of the government imposing penalties on the company.

3. Scenario 2

Urban Fly Airlines Private Limited hereinafter referred to as “the company” operates a fleet of commercial aircraft. As per aviation regulations, every aircraft must undergo a major overhaul once every three years to ensure safety and compliance. The overhaul involves dismantling and inspecting major components of the aircraft, replacing worn-out parts, and reassembling the aircraft for certified operation. Whether a provision is required to be recognized over the three year period for the overhaul cost as at 31st March, 2024?

3.1 Analysis

Despite the company being legally required to perform an overhaul every three years, no present obligation exists as at 31st March 2024. The overhaul is not triggered by a past event but by future actions of the company. Even the intention to incur the expenditure depends on the company deciding to continue operating the aircraft or to replace the aircraft. Thus, there is no present obligation. Hence, there is no requirement to recognize provision for the overhaul cost as at 31st March, 2024.

However, under Ind AS 16, Property, Plant and Equipment the cost of major inspections or overhauls is capitalised as a separate component of the aircraft’s carrying amount and depreciated over the period until the next scheduled overhaul.

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