Provisions vs Contingencies
Provision: A recognised liability for a present obligation (legal or constructive) with probable outflow. Goes on the balance sheet.
Contingent liability: Possible obligation or remote likelihood. Disclosed in footnotes (not on balance sheet).
The "Probable" Threshold
IFRS 37: "Probable" = more likely than not (>50% chance). Provisions recognised when probable. Contingencies disclosed when possible but not probable.
ASC 450: "Probable" = likely to occur (similar to IFRS but less rigid). Threshold is slightly higher than 50%. Contingencies are disclosure-only; provisions are rare in ASC (mostly limited to restructuring, warranties, environmental).
Practical difference: IFRS recognises more items as provisions (broader scope). ASC defers many to disclosure.
When to Recognise
IFRS 37 requirements:
- Present obligation (legal or constructive)
- Probable outflow of resources
- Reliable estimate of amount
ASC 450 requirements: Similar, but contingencies are narrowly defined. Most litigation, claims, and environmental matters are disclosure-only unless the threshold for accrual is clearly met.
Measurement and Present Value
IFRS 37: Provisions measured at present value of expected outflows. Discounting is mandatory for long-term amounts using a pre-tax rate reflecting the specific risks.
ASC 450: Contingencies measured at undiscounted amount (or best estimate without discounting in many cases). No mandatory discounting.
Impact: IFRS provisions are often lower (discounted). ASC contingencies, when recognised, are at full undiscounted amount.
Restructuring: The Big Difference
IFRS 37: A restructuring provision is recognised only when a detailed plan is approved and announced, creating a constructive obligation. A constructive obligation arises when the entity has created a valid expectation in others that it will carry out the restructuring.
ASC 450: Restructuring costs are sometimes accrued, but only when the plan is formally approved and committed.
Real difference: IFRS may recognise a restructuring provision before ASC, creating a timing difference in P&L.
Worked Example: Restructuring Provision
Scenario: Plant Closure and Severance
Context: UK manufacturing company announces plan to close a factory in Q3 2026, with severance payable over 12 months (Q4 2026 — Q3 2027).
- Estimated severance costs: £2M
- One-time closure costs (lease termination, equipment disposal): £500k
- Timeline: announcement Sep 2026, payments start Oct 2026
IFRS 37 (as at Sep 2026, announcement date):
- Detailed plan is in place and approved by the board
- Announcement creates constructive obligation (employees have valid expectation)
- Recognise provision: £2M severance + £500k closure = £2.5M (discounted at say 3% = £2.43M)
- Expense recorded in Q3 2026
ASC 450 (as at Sep 2026):
- Plan is approved, but not yet committed with a detailed communication (some may argue commitment is sufficient)
- May accrue (or may only disclose as a contingency)
- If accrued: £2.5M at full undiscounted amount (no present value discount)
- If not accrued: disclosure only in footnotes
Outcome: IFRS company records £2.43M provision in Q3; ASC company might delay accrual to Q4 (when payments begin) or accrue at higher undiscounted amount (£2.5M).
Onerous Contracts
Both standards require a provision for onerous contracts (unfavourable contracts where unavoidable costs exceed benefits).
Examples: A long-term fixed-price supply contract where costs have risen beyond the fixed price.
IFRS 37: Provision recognised for the excess of expected costs over revenue for the remaining contract term.
ASC 450: Similar, but recognition threshold is slightly higher.
Audit Implications
- Restructuring: Challenge timing. IFRS auditors expect earlier recognition (constructive obligation). ASC auditors may accept later timing.
- Present value: IFRS requires discounting; ensure management has applied correct discount rate. ASC does not require discounting.
- Contingency disclosures: Both standards require disclosure of possible/remote obligations. Ensure completeness — pending litigation, environmental claims, warranty claims.
- Estimate changes: Track provisions period-to-period. Significant reversals signal weak initial estimates.
Need help with a restructuring or contingency?
Use GAAP Compare to research IFRS 37 vs ASC 450, or ask an expert in the Meeting Room.
Compare Standards →FAQs
What is the difference between a provision and a contingency?
A provision is a recognised liability for a probable obligation (balance sheet). A contingency is a possible obligation disclosed in footnotes only.
What is the probable threshold?
IFRS 37: more likely than not (>50%). ASC 450: likely to occur (similar but slightly higher threshold).
When can a restructuring be recognised as a provision?
IFRS 37: when a detailed plan is approved and creates a constructive obligation (announcement date). ASC 450: when formally approved and committed (may be later).
This guide is simplified. Provisions depend on specific facts and legal advice. Consult IFRS 37 and ASC 450 full text, and your own advisors.
Real-Life Case Study: A Lawsuit Provision Under IAS 37 vs ASC 450
Scenario. A group faces litigation with a possible loss between £2m and £6m, all outcomes in the range equally likely, and reports under both frameworks.
The difference. IAS 37 recognises when an outflow is "probable" (interpreted as more likely than not, >50%) and, for a range of equally likely outcomes, uses the mid-point (£4m). US GAAP (ASC 450) recognises when a loss is "probable" (a higher threshold in practice) and, for a range with no better estimate, books the low end (£2m).
Takeaway. Same facts, different numbers: the recognition threshold ("probable" means different things) and the range convention (mid-point vs minimum) can leave IFRS carrying £4m where US GAAP carries £2m.
Illustrative composite scenario for educational purposes. Figures are indicative and do not represent any specific company.