Ind AS 37 addresses one of the most judgement-intensive areas of financial reporting — when to recognise a provision (i.e., a liability of uncertain timing or amount) versus merely disclosing a contingent liability, and how to measure provisions reliably. The distinction matters enormously: a provision hits the P&L immediately; a contingent liability is only disclosed in notes. Getting this wrong — in either direction — can materially misstate a company's financial position and create regulatory and audit risks.
The Three-Part Recognition Criteria for Provisions
A provision must be recognised when ALL THREE of the following conditions are simultaneously met:
- Present obligation — as a result of a past event, the entity has a present legal or constructive obligation
- Probable outflow — it is probable (more likely than not) that an outflow of resources embodying economic benefits will be required to settle the obligation
- Reliable estimate — a reliable estimate can be made of the amount of the obligation
Key definitions:
- Legal obligation: Arises from contract, legislation, or other operation of law
- Constructive obligation: Arises from established pattern of past practice, published policies, or current statements that create valid expectation that the entity will discharge the obligation (e.g., an entity that has always given customer refunds even without legal obligation)
- Probable: More likely than not — i.e., probability > 50%
- Reliable estimate: If no estimate can be made, a provision cannot be recognised (disclose as contingent liability instead)
Provision vs Contingent Liability vs Contingent Asset
Provision (Recognise)
- Present obligation exists
- Probable outflow (>50%)
- Reliable estimate possible
Treatment: Recognised as liability in balance sheet; expense in P&L
Examples: warranty claims, legal judgements where loss is probable, decommissioning costs
Contingent Liability (Disclose Only)
- Possible obligation (not yet confirmed as present obligation), OR
- Present obligation but outflow not probable (<50%), OR
- Present obligation but amount cannot be reliably estimated
Treatment: Not recognised; disclosed in notes only
Examples: legal cases where outcome is uncertain, tax demands under appeal
| Probability of Outflow | Reliable Estimate? | Treatment |
|---|
| Virtually certain (>95%) | Yes | Recognise as provision (or accrued liability) |
| Probable (>50%) | Yes | Recognise as provision |
| Probable (>50%) | No | Disclose as contingent liability |
| Possible (5%–50%) | Yes/No | Disclose as contingent liability |
| Remote (<5%) | Yes/No | Neither recognise nor disclose (unless material) |
Contingent Assets
A contingent asset is a possible asset that depends on future uncertain events. Treatment is the mirror of contingent liabilities but asymmetric (conservatism principle):
- If inflow is virtually certain: recognise as an asset (it's no longer contingent)
- If inflow is probable but not certain: disclose in notes only
- If inflow is possible: no recognition or disclosure required
Measurement: Best Estimate, Expected Value & Discounting
The amount recognised as a provision is the best estimate of the expenditure required to settle the obligation at the reporting date.
Single Obligation: Most Likely Outcome
For a single obligation (e.g., one pending lawsuit), the best estimate is the most likely outcome — not the average, not the worst case. If a lawsuit is expected to result in either ₹1 crore (70% probability) or ₹5 crore (30%), the best estimate is ₹1 crore (most likely).
Large Population of Obligations: Expected Value
For warranty provisions across thousands of items, use probability-weighted expected value:
Expected Value Calculation — Warranty (1,000 units sold)
No defect (60% probability)
Cost = ₹0
Minor repair (30% probability)
Cost = ₹5,000 per unit
Major repair/replacement (10% probability)
Cost = ₹25,000 per unit
Expected cost per unit = (0×60%) + (5,000×30%) + (25,000×10%)
= ₹4,000
Total warranty provision (1,000 units)
= ₹40,00,000
Discounting
Where the time value of money is material (provision expected to be settled more than 12 months in the future), the provision must be discounted to present value using a pre-tax risk-free rate reflecting current market assessments. The unwinding of the discount each year is recognised as a finance cost in P&L.
ℹWhat is NOT a provision: Future operating losses cannot be provisioned — they don't meet the definition of a present obligation from a past event. Depreciation is an accrual, not a provision. Amounts set aside as general reserves "just in case" without a specific obligation are not provisions under Ind AS 37.
Onerous Contracts
An onerous contract is one where the unavoidable costs of meeting the obligations exceed the economic benefits expected. Once a contract becomes onerous, the present obligation under the contract is recognised as a provision.
Unavoidable cost = lower of: (a) cost of fulfilling the contract, OR (b) penalties from failing to fulfil it.
Example: Onerous Lease (Post-Ind AS 116)
A company has a remaining lease liability of ₹2 crore for office space it has vacated and cannot sub-let. Monthly rent of ₹8 lakh; space generates ₹0 economic benefit. The lease is onerous — unavoidable cost (₹2 crore remaining payments) exceeds expected economic benefit (₹0). Provision: ₹2 crore recognised immediately, reducing right-of-use asset first and recognising any excess as a separate provision.
Before recognising an onerous contract provision, the entity should first recognise any impairment loss on assets dedicated to that contract.
Restructuring Provisions
A restructuring provision can only be recognised when the entity has a constructive obligation to restructure — i.e., it has:
- A detailed formal plan for the restructuring (identifying: business/part affected, locations, employees, timeline, estimated cost), AND
- Raised a valid expectation in those affected that it will carry out the restructuring — by starting to implement the plan OR by announcing its main features to those affected
A board decision to restructure alone does not create a constructive obligation if it has not been communicated to affected parties before the reporting date.
Costs included in restructuring provision: Only directly attributable costs — employee termination costs, contract penalties for terminated contracts, site clean-up costs.
Costs NOT included: Retraining/relocating continuing staff, marketing, new systems investment — these are future operating costs, not restructuring obligations.
Environmental & Decommissioning Provisions
Environmental restoration and asset decommissioning create present obligations recognised as provisions. These are typically long-dated (settled 10–40 years in future) and must be:
- Recognised as a provision when the obligation exists (even if settlement is far future)
- Added to the cost of the related asset (e.g., decommissioning cost of an oil platform is capitalised as part of the platform's cost — creates a "decommissioning asset")
- Discounted to present value using risk-free rate
- The discount unwinding each year is finance cost in P&L
- Reassessed each year — changes in estimate adjust the provision and the related asset
Case Study: Infosys — Legal Claims & Tax Provisions
⚖ Infosys: Managing Contingencies in Tech Services
Infosys Limited | Ind AS 37 Application | FY 2024–25
As a global IT services company with 300,000+ employees and clients across 50+ countries, Infosys faces multiple categories of contingencies requiring Ind AS 37 analysis:
| Contingency Type | Ind AS 37 Classification | FY25 Treatment |
|---|
| Income tax demands (India) | Contingent liability (under appeal; outcome uncertain) | Disclosed in notes; amount ₹10,000+ crore disputed |
| Transfer pricing disputes (India) | Contingent liability — no provision unless loss probable | Disclosed; ₹8,000+ crore under dispute |
| Client contract penalties (probable) | Provision — recognised in P&L | Included in trade payables / accrued liabilities |
| Immigration penalties (US visa compliance) | Depends on probability; historically disclosed | Disclosed; historical settlement of $34M (2019) |
| Warranty / service level guarantees | Provision — calculated on expected value basis | Provision recognised based on portfolio claims history |
Total Contingent Liabilities (FY25)
~₹22,000 crore (disclosed in notes)
Provisions Recognised (Balance Sheet)
~₹5,500 crore (warranty, probable claims)
Tax Provision Policy
Provisions for tax uncertainties where >50% probable; rest disclosed
Audit Risk
Transfer pricing provisions — key audit matter in statutory auditor report
Case Study: ONGC — Decommissioning Liabilities
🚭 ONGC: Asset Retirement Obligations (ARO)
Oil & Natural Gas Corporation | Ind AS 37 Application | FY 2024–25
ONGC operates 250+ offshore oil and gas installations in Indian waters. Under Ind AS 37 and its Production Sharing Contracts, ONGC must recognise asset retirement obligations (AROs) for the cost of decommissioning these platforms at end of field life.
Total ARO Provision (FY25)
~₹15,000 crore (discounted)
Discount Rate Used
6.5–7.5% (pre-tax risk-free rate)
Unwinding of Discount (Finance Cost)
~₹1,000 crore/year added to finance costs
Decommissioning Asset (Capitalised)
Added to Oil & Gas Assets; depreciated over field life
The accounting treatment: when ONGC installs a platform, it immediately recognises (1) a decommissioning provision (liability) equal to present value of future abandonment cost, and (2) a corresponding decommissioning asset (capitalised as part of the platform). The asset is depreciated over the platform's producing life; the provision unwinds each year (adding to finance costs); and both are revised annually as cost estimates change.
This is why ONGC's long-term provisions are substantial — and why any change in decommissioning cost estimates creates both P&L and balance sheet impacts.
Case Study: Tata Steel — Restructuring & Environmental Provisions
🏭 Tata Steel: European Restructuring & Environmental Liabilities
Tata Steel Limited | Ind AS 37 Application | FY 2024–25
Tata Steel's UK operations (Port Talbot blast furnace closure) created significant restructuring and environmental provisions in FY24–25. The closure announcement in January 2024, with a formal restructuring plan communicated to employees and unions, triggered Ind AS 37 provision recognition.
| Provision Category | Amount (Approx.) | Ind AS 37 Trigger |
|---|
| Employee redundancy (UK — ~2,800 workers) | ~£300 million | Constructive obligation — announcement to employees + formal plan |
| Site environmental remediation (Port Talbot) | ~£100–200 million | Legal obligation under UK environmental law |
| Contract termination penalties (supply agreements) | ~£50–100 million | Onerous contracts — avoidance costs lower than fulfillment |
| Pension additional obligations | Separately under Ind AS 19 | Not Ind AS 37 — covered by Ind AS 19 |
Total Restructuring Provision (FY25)
~₹6,000–8,000 crore (India GAAP equivalent)
P&L Impact (Exceptional)
Recognised as exceptional item in FY24–25
Key Ind AS 37 Issue
Formal plan + employee communication was the trigger date — before announcement, no provision allowed
Audit Focus
Timing of recognition (when constructive obligation arose); estimate reliability
Comparison: Ind AS 37 vs Old IGAAP & Key Disclosures
Old IGAAP (AS 29)
- Similar three-part recognition criteria
- Discounting of provisions not explicitly required
- Onerous contracts concept not explicitly in AS 29
- Restructuring provisions — similar criteria but less detailed guidance
- Asset retirement obligations — limited explicit guidance
Ind AS 37
- Same three-part criteria
- Discounting required where time value is material
- Onerous contracts explicitly addressed with detailed guidance
- Restructuring provisions — detailed criteria for constructive obligation
- AROs explicitly addressed; consistent with IFRIC 1
Key Disclosures (for each class of provision)
- Carrying amount at beginning and end of period
- Additional provisions made during the period, including increases to existing provisions
- Amounts used (incurred and charged against provision) during the period
- Unused amounts reversed during the period
- Amount of discount unwinding recognised as finance cost
- Brief description of nature of obligation and expected timing of outflow
- Indication of uncertainties in amount/timing; key assumptions
- Amount of any expected reimbursement (e.g., insurance recovery)
For contingent liabilities:
- Estimate of financial effect
- Indication of uncertainties
- Possibility of any reimbursement
- Where disclosure would be "seriously prejudicial" to outcome of dispute — state nature of dispute only, explain why not disclosed in full
Journal Entries: Warranty Provision
Dr Warranty Expense (P&L)
₹40,00,000
Cr Provision for Warranties (Balance Sheet)
₹40,00,000
When Warranty is Actually Claimed
Dr Provision for Warranties
₹4,00,000
Cr Inventory / Labour Payable
₹4,00,000
Decommissioning Provision (Initial Recognition)
Dr Oil & Gas Asset (Decommissioning Component)
₹15,00,00,000
Cr Provision for Decommissioning (Balance Sheet)
₹15,00,00,000
Unwinding of Discount (Year 1)
Dr Finance Costs (P&L)
₹1,05,00,000
Cr Provision for Decommissioning
₹1,05,00,000
(₹15 crore × 7% discount rate = ₹1.05 crore unwinding)
Accounting Standards · Ind AS
Ind AS 37: Provisions, Contingent Liabilities & Contingent Assets
Finin2min Research Desk·June 2026·13 min readICAI / MCAInd AS Series
StandardInd AS 37Ind AS 37: Provisions, Contingent Liabilities & Contingent AssetsMCA Notification ↗
Ind AS 37 addresses one of the most judgement-intensive areas of financial reporting — when to recognise a provision (i.e., a liability of uncertain timing or amount) versus merely disclosing a contingent liability, and how to measure provisions reliably. The distinction matters enormously: a provision hits the P&L immediately; a contingent liability is only disclosed in notes. Getting this wrong — in either direction — can materially misstate a company's financial position and create regulatory and audit risks.
The Three-Part Recognition Criteria for Provisions
A provision must be recognised when ALL THREE of the following conditions are simultaneously met:
- Present obligation — as a result of a past event, the entity has a present legal or constructive obligation
- Probable outflow — it is probable (more likely than not) that an outflow of resources embodying economic benefits will be required to settle the obligation
- Reliable estimate — a reliable estimate can be made of the amount of the obligation
Key definitions:
- Legal obligation: Arises from contract, legislation, or other operation of law
- Constructive obligation: Arises from established pattern of past practice, published policies, or current statements that create valid expectation that the entity will discharge the obligation (e.g., an entity that has always given customer refunds even without legal obligation)
- Probable: More likely than not — i.e., probability > 50%
- Reliable estimate: If no estimate can be made, a provision cannot be recognised (disclose as contingent liability instead)
Provision vs Contingent Liability vs Contingent Asset
Provision (Recognise)
- Present obligation exists
- Probable outflow (>50%)
- Reliable estimate possible
Treatment: Recognised as liability in balance sheet; expense in P&L
Examples: warranty claims, legal judgements where loss is probable, decommissioning costs
Contingent Liability (Disclose Only)
- Possible obligation (not yet confirmed as present obligation), OR
- Present obligation but outflow not probable (<50%), OR
- Present obligation but amount cannot be reliably estimated
Treatment: Not recognised; disclosed in notes only
Examples: legal cases where outcome is uncertain, tax demands under appeal
| Probability of Outflow | Reliable Estimate? | Treatment |
|---|
| Virtually certain (>95%) | Yes | Recognise as provision (or accrued liability) |
| Probable (>50%) | Yes | Recognise as provision |
| Probable (>50%) | No | Disclose as contingent liability |
| Possible (5%–50%) | Yes/No | Disclose as contingent liability |
| Remote (<5%) | Yes/No | Neither recognise nor disclose (unless material) |
Contingent Assets
A contingent asset is a possible asset that depends on future uncertain events. Treatment is the mirror of contingent liabilities but asymmetric (conservatism principle):
- If inflow is virtually certain: recognise as an asset (it's no longer contingent)
- If inflow is probable but not certain: disclose in notes only
- If inflow is possible: no recognition or disclosure required
Measurement: Best Estimate, Expected Value & Discounting
The amount recognised as a provision is the best estimate of the expenditure required to settle the obligation at the reporting date.
Single Obligation: Most Likely Outcome
For a single obligation (e.g., one pending lawsuit), the best estimate is the most likely outcome — not the average, not the worst case. If a lawsuit is expected to result in either ₹1 crore (70% probability) or ₹5 crore (30%), the best estimate is ₹1 crore (most likely).
Large Population of Obligations: Expected Value
For warranty provisions across thousands of items, use probability-weighted expected value:
Expected Value Calculation — Warranty (1,000 units sold)
No defect (60% probability)
Cost = ₹0
Minor repair (30% probability)
Cost = ₹5,000 per unit
Major repair/replacement (10% probability)
Cost = ₹25,000 per unit
Expected cost per unit = (0×60%) + (5,000×30%) + (25,000×10%)
= ₹4,000
Total warranty provision (1,000 units)
= ₹40,00,000
Discounting
Where the time value of money is material (provision expected to be settled more than 12 months in the future), the provision must be discounted to present value using a pre-tax risk-free rate reflecting current market assessments. The unwinding of the discount each year is recognised as a finance cost in P&L.
ℹWhat is NOT a provision: Future operating losses cannot be provisioned — they don't meet the definition of a present obligation from a past event. Depreciation is an accrual, not a provision. Amounts set aside as general reserves "just in case" without a specific obligation are not provisions under Ind AS 37.
Onerous Contracts
An onerous contract is one where the unavoidable costs of meeting the obligations exceed the economic benefits expected. Once a contract becomes onerous, the present obligation under the contract is recognised as a provision.
Unavoidable cost = lower of: (a) cost of fulfilling the contract, OR (b) penalties from failing to fulfil it.
Example: Onerous Lease (Post-Ind AS 116)
A company has a remaining lease liability of ₹2 crore for office space it has vacated and cannot sub-let. Monthly rent of ₹8 lakh; space generates ₹0 economic benefit. The lease is onerous — unavoidable cost (₹2 crore remaining payments) exceeds expected economic benefit (₹0). Provision: ₹2 crore recognised immediately, reducing right-of-use asset first and recognising any excess as a separate provision.
Before recognising an onerous contract provision, the entity should first recognise any impairment loss on assets dedicated to that contract.
Restructuring Provisions
A restructuring provision can only be recognised when the entity has a constructive obligation to restructure — i.e., it has:
- A detailed formal plan for the restructuring (identifying: business/part affected, locations, employees, timeline, estimated cost), AND
- Raised a valid expectation in those affected that it will carry out the restructuring — by starting to implement the plan OR by announcing its main features to those affected
A board decision to restructure alone does not create a constructive obligation if it has not been communicated to affected parties before the reporting date.
Costs included in restructuring provision: Only directly attributable costs — employee termination costs, contract penalties for terminated contracts, site clean-up costs.
Costs NOT included: Retraining/relocating continuing staff, marketing, new systems investment — these are future operating costs, not restructuring obligations.
Environmental & Decommissioning Provisions
Environmental restoration and asset decommissioning create present obligations recognised as provisions. These are typically long-dated (settled 10–40 years in future) and must be:
- Recognised as a provision when the obligation exists (even if settlement is far future)
- Added to the cost of the related asset (e.g., decommissioning cost of an oil platform is capitalised as part of the platform's cost — creates a "decommissioning asset")
- Discounted to present value using risk-free rate
- The discount unwinding each year is finance cost in P&L
- Reassessed each year — changes in estimate adjust the provision and the related asset
Case Study: Infosys — Legal Claims & Tax Provisions
⚖ Infosys: Managing Contingencies in Tech Services
Infosys Limited | Ind AS 37 Application | FY 2024–25
As a global IT services company with 300,000+ employees and clients across 50+ countries, Infosys faces multiple categories of contingencies requiring Ind AS 37 analysis:
| Contingency Type | Ind AS 37 Classification | FY25 Treatment |
|---|
| Income tax demands (India) | Contingent liability (under appeal; outcome uncertain) | Disclosed in notes; amount ₹10,000+ crore disputed |
| Transfer pricing disputes (India) | Contingent liability — no provision unless loss probable | Disclosed; ₹8,000+ crore under dispute |
| Client contract penalties (probable) | Provision — recognised in P&L | Included in trade payables / accrued liabilities |
| Immigration penalties (US visa compliance) | Depends on probability; historically disclosed | Disclosed; historical settlement of $34M (2019) |
| Warranty / service level guarantees | Provision — calculated on expected value basis | Provision recognised based on portfolio claims history |
Total Contingent Liabilities (FY25)
~₹22,000 crore (disclosed in notes)
Provisions Recognised (Balance Sheet)
~₹5,500 crore (warranty, probable claims)
Tax Provision Policy
Provisions for tax uncertainties where >50% probable; rest disclosed
Audit Risk
Transfer pricing provisions — key audit matter in statutory auditor report
Case Study: ONGC — Decommissioning Liabilities
🚭 ONGC: Asset Retirement Obligations (ARO)
Oil & Natural Gas Corporation | Ind AS 37 Application | FY 2024–25
ONGC operates 250+ offshore oil and gas installations in Indian waters. Under Ind AS 37 and its Production Sharing Contracts, ONGC must recognise asset retirement obligations (AROs) for the cost of decommissioning these platforms at end of field life.
Total ARO Provision (FY25)
~₹15,000 crore (discounted)
Discount Rate Used
6.5–7.5% (pre-tax risk-free rate)
Unwinding of Discount (Finance Cost)
~₹1,000 crore/year added to finance costs
Decommissioning Asset (Capitalised)
Added to Oil & Gas Assets; depreciated over field life
The accounting treatment: when ONGC installs a platform, it immediately recognises (1) a decommissioning provision (liability) equal to present value of future abandonment cost, and (2) a corresponding decommissioning asset (capitalised as part of the platform). The asset is depreciated over the platform's producing life; the provision unwinds each year (adding to finance costs); and both are revised annually as cost estimates change.
This is why ONGC's long-term provisions are substantial — and why any change in decommissioning cost estimates creates both P&L and balance sheet impacts.
Case Study: Tata Steel — Restructuring & Environmental Provisions
🏭 Tata Steel: European Restructuring & Environmental Liabilities
Tata Steel Limited | Ind AS 37 Application | FY 2024–25
Tata Steel's UK operations (Port Talbot blast furnace closure) created significant restructuring and environmental provisions in FY24–25. The closure announcement in January 2024, with a formal restructuring plan communicated to employees and unions, triggered Ind AS 37 provision recognition.
| Provision Category | Amount (Approx.) | Ind AS 37 Trigger |
|---|
| Employee redundancy (UK — ~2,800 workers) | ~£300 million | Constructive obligation — announcement to employees + formal plan |
| Site environmental remediation (Port Talbot) | ~£100–200 million | Legal obligation under UK environmental law |
| Contract termination penalties (supply agreements) | ~£50–100 million | Onerous contracts — avoidance costs lower than fulfillment |
| Pension additional obligations | Separately under Ind AS 19 | Not Ind AS 37 — covered by Ind AS 19 |
Total Restructuring Provision (FY25)
~₹6,000–8,000 crore (India GAAP equivalent)
P&L Impact (Exceptional)
Recognised as exceptional item in FY24–25
Key Ind AS 37 Issue
Formal plan + employee communication was the trigger date — before announcement, no provision allowed
Audit Focus
Timing of recognition (when constructive obligation arose); estimate reliability
Comparison: Ind AS 37 vs Old IGAAP & Key Disclosures
Old IGAAP (AS 29)
- Similar three-part recognition criteria
- Discounting of provisions not explicitly required
- Onerous contracts concept not explicitly in AS 29
- Restructuring provisions — similar criteria but less detailed guidance
- Asset retirement obligations — limited explicit guidance
Ind AS 37
- Same three-part criteria
- Discounting required where time value is material
- Onerous contracts explicitly addressed with detailed guidance
- Restructuring provisions — detailed criteria for constructive obligation
- AROs explicitly addressed; consistent with IFRIC 1
Key Disclosures (for each class of provision)
- Carrying amount at beginning and end of period
- Additional provisions made during the period, including increases to existing provisions
- Amounts used (incurred and charged against provision) during the period
- Unused amounts reversed during the period
- Amount of discount unwinding recognised as finance cost
- Brief description of nature of obligation and expected timing of outflow
- Indication of uncertainties in amount/timing; key assumptions
- Amount of any expected reimbursement (e.g., insurance recovery)
For contingent liabilities:
- Estimate of financial effect
- Indication of uncertainties
- Possibility of any reimbursement
- Where disclosure would be "seriously prejudicial" to outcome of dispute — state nature of dispute only, explain why not disclosed in full
Journal Entries: Warranty Provision
Dr Warranty Expense (P&L)
₹40,00,000
Cr Provision for Warranties (Balance Sheet)
₹40,00,000
When Warranty is Actually Claimed
Dr Provision for Warranties
₹4,00,000
Cr Inventory / Labour Payable
₹4,00,000
Decommissioning Provision (Initial Recognition)
Dr Oil & Gas Asset (Decommissioning Component)
₹15,00,00,000
Cr Provision for Decommissioning (Balance Sheet)
₹15,00,00,000
Unwinding of Discount (Year 1)
Dr Finance Costs (P&L)
₹1,05,00,000
Cr Provision for Decommissioning
₹1,05,00,000
(₹15 crore × 7% discount rate = ₹1.05 crore unwinding)
Frequently Asked Questions
What is the difference between a provision and an accrual under Ind AS 37? ▼
The distinction lies in the degree of certainty. An accrual is a liability for goods or services received but not yet invoiced or paid — it is virtually certain in amount and timing (e.g., electricity bill for the last 10 days of the month, or professional fees invoiced after year-end but for work done before). A provision involves significant uncertainty in amount or timing. In practice: salary payable at month-end = accrual (certain); warranty claims on goods sold = provision (uncertain outcome and timing). Accruals are often shown within trade payables; provisions are a separate balance sheet line item.
Can a company recognise a provision for future operating losses? ▼
No. Ind AS 37 explicitly prohibits provisions for future operating losses because they do not meet the definition of a liability — there is no present obligation arising from a past event. Future losses reflect the expected results of future operations, not obligations that currently exist. The only exception is onerous contracts — where a contract already entered into is expected to generate unavoidable losses, those contractually obligated losses qualify as a provision. The distinction: a general expectation of operating losses → no provision; specific existing contract that will be loss-making → onerous contract provision.
How should a company treat income tax demands that are disputed and under appeal? ▼
Under Ind AS 37, income tax demands under appeal are typically classified as contingent liabilities — because the existence of the present obligation is uncertain (appeal may succeed) or the outflow is not probable. Companies disclose these amounts in notes to financial statements without recognising any provision. However, where legal opinion suggests the appeal is likely to fail (loss probability > 50%), a provision must be recognised. In practice, most Indian companies disclose tax demands under appeal as contingent liabilities with a statement that based on legal advice, no provision is considered necessary — but auditors closely scrutinise the basis for this conclusion, particularly for large amounts.