The IAS 37 Strategic Advantage: How Accurate Provisions Build Investor Confidence
A tech company just announced a $30 million provision they should have booked two years ago. Their excuse? “Legal said we’d probably win.” IAS 37 doesn’t care what legal thinks—and neither did their auditors.
The Probability Problem
Everyone knows the rule: Book a provision when an outflow is “probable.” But here’s the killer—probable means more than 50% likely, not “we think we’ll win.”
The mindset trap: Your lawyers say you have a “strong case.” You interpret this as <50% chance of losing. But IAS 37 looks at it differently:
- Have you been sued? ✓
- Could you lose? ✓
- Would you pay if you lose? ✓
- Is losing more likely than not? That’s the only question.
One pharmaceutical company learned this the hard way. Five lawsuits pending, lawyers “confident” on all. Reality? Three required provisions. The catch-up adjustment spooked investors for months.
The Measurement Minefield
So you need a provision. How much? “Best estimate” sounds vague because it is. But IAS 37 has rules:
Single obligation: Use the most likely outcome Large population: Use expected value (probability-weighted)
Classic mistake: A retailer faces 100 warranty claims. They book the average claim amount times 100. Wrong! You need probability-weighting. If 60% of claims are $100, 30% are $500, and 10% are $1,000, your provision per claim is $280, not the simple average.
The Restructuring Trap
Planning to close a factory? Cut 500 jobs? Until you have a detailed formal plan AND have announced it, you have nothing. Thinking about it doesn’t count. Board approval doesn’t count.
The disaster scenario: Company records restructuring provision in December based on “firm management intention.” Announces to employees in February. Auditors: “Reverse it and restate.” Market: “What else are you hiding?”
The Contingency Confusion
Not everything uncertain gets recorded. IAS 37 splits the universe into:
- Provisions (record them)
- Contingent liabilities (disclose them)
- Contingent assets (mostly ignore them)
The asymmetry trap: Facing a lawsuit? Might need a provision. Suing someone else? Can’t book anything until virtually certain of winning. One company offset expected lawsuit wins against losses. Result? Major restatement and credibility crisis.
Your Takeaway as an Accountant
Stop asking lawyers “Will we win?” Start asking “What’s the percentage chance we lose?” Document every probability assessment. Review provisions quarterly—not just at year-end. Create a provisions register tracking each item from potential issue to resolution.
Most importantly: Bad news doesn’t age well. The earlier you recognize reality, the smaller the surprise.
Master the gray areas with ACCOUNTANT MINDSET—where judgment meets precision.
