IAS 37 in the spotlight

So, even as new standards are issued, and discussions around climate uncertainties continue, the principles of IAS 37 remain key to a lot of items. That doesn’t mean that these principles are not able to be updated, and there is a current programme on the IASB workplan called ‘provisions – targeted improvements’.

As part of this, the IASB released an exposure draft in November 2024, which has attracted multiple responses. The project is moving towards completion, with a handful of notable changes proposed. The changes are targeted at three aspects of IAS 37: the recognition criteria, costs to be included and discount rates to be used.

Recognition criteria

A key pillar for a provision to be recognised under IAS 37 has been that it requires three criteria to be satisfied:

• It has a present obligation from a past event (criterion 1)
• It has a probable outflow of economic resources (criterion 2)
• The amount can be estimated reliably (criterion 3).

The IASB has noted that the most difficult issue in establishing whether a provision is required deals with criterion 1 and establishing whether a present obligation exists.

Currently, IAS 37 looks at a present obligation in terms of whether an entity could avoid the transfer of economic resources. Now, the draft reframes this as ‘the practical ability to avoid the obligation under law’.

This was debated by respondents, and the language has been tweaked to ‘the practical ability to avoid discharging a legal responsibility’, with additional clarification provided regarding how the entity could be forced to discharge the responsibility.

One consequence of this could be linked to levies, including on emissions. Currently, IFRIC 21, Levies, will be applied but this will now be removed and brought into the principles of IAS 37.

Instead of providing for the levy when the emissions level is breached, it appears that the current activity will breach the threshold within the given time period. This may mean that in threshold-based scenarios, provisions will be applied earlier and progressively as activities are undertaken, rather than at the point the threshold is breached.

The levy situation has proved challenging, and the IASB is consulting IFRS specialists at large accounting firms.

Costs to be included

The current proposal is to add a requirement to IAS 37 clarifying that the expenditure required to settle an obligation comprises the costs that relate directly to the obligation. This will state that the costs that relate directly to an obligation consist of both:

• the incremental costs of settling that obligation
• an allocation of other costs that relate directly to settling obligations of that type.

This could mean that provisions become larger, including allocations of internal legal-team costs in addition to amounts paid to external lawyers and claimants.

Discount rates

The final proposal was the least debated of all of them: that an entity will discount a provision at a rate that reflects the time value of money, with no adjustment for the effect of non-performance risk. The rates used will need to be disclosed, alongside the basis for determining them.

This has a knock-on effect for IFRS 3, Business Combinations, where provisions could be measured at fair value using a credit-adjusted discount rate and then subsequently measured under IAS 37 using a risk-free discount rate. This would lead to ‘day 2’ adjustments. Therefore, a paragraph will be added to IFRS 3 to state that provisions will be measured in accordance with IAS 37, instead of at fair value.

The next step in the project will be the ‘final amendments’ stage, with some proposals over past events yet to be discussed in addition to the outstanding work on the levies. This is expected in early 2027, by which time IAS 37 may finally have climbed to the top step of the Deller standard podium.