A promise may have no exact payment date
IAS 37 defines a provision as a liability of uncertain timing or amount and distinguishes legal obligations from obligations created by established practice. Source: **curr-stat-ias37**, About, Provisions. Management’s intention to spend money does not by itself mean that an existing obligation to another party has arisen. Conversely, the absence of a final invoice does not prove that there is no basis for recognition.
Separate recognition from disclosure
The official IAS 37 overview includes possible obligations and certain unrecognised obligations within contingent liabilities; disclosure is considered unless the possibility of an outflow is remote. Source: **curr-stat-ias37**, About, Contingent liabilities. A figure in a risk section may therefore have a different status from a figure in a balance-sheet line.
Do not add a recognised provision to the maximum claim for the same dispute without checking whether they describe different risks or one event measured in different ways. A working table should keep the event identifier, recognised amount, disclosed uncertainty and analyst scenarios in separate columns. This prevents double counting and creates a transparent path from document to conclusion.
A warranty in a fictional portfolio
A manufacturer sells 1,000 identical devices. In the model, repairs are needed for 8% of devices at a cost of 20 per device, while the remainder needs no repair. A simple probability estimate is 1,000 × 0.08 × 20 = 1,600. This illustrates averaging across many homogeneous cases; it is not a method for selecting an amount for one complex lawsuit.
If information about defects changes and the expected repair share rises to 11% while the repair price stays the same, the estimate becomes 2,200; the change is 600. Cash payments for individual repairs may occur over several periods. Recognised expense, the remaining obligation and actual payments therefore need separate lines.
A provision is not a savings account
A provision is not necessarily segregated cash. It represents an obligation and its estimate. An organisation may have a provision in its accounts while lacking liquid resources for settlement. Solvency analysis must compare payment timing with available resources rather than treating the provision itself as funding.
Another common error is recognising a provision for every expected future loss. The official overview notes that future operating losses do not by themselves create an obligation at period end. Source: **curr-stat-ias37**, About, special cases. Otherwise a poor forecast could be turned arbitrarily into a current liability and moved between periods.
How to read a change in the estimate
Ask what explains the increase: new events, changed probabilities, a revised cost of fulfilment or the passage of time. If the amount falls, determine whether the obligation was settled or the estimate changed. A lower balance caused by payment has a different meaning for profit and cash from a lower balance caused by reversing an estimate.
For long-term obligations, payment timing and discounting matter; the educational model excludes them. This material does not assess the probability of a particular court decision or prescribe entries for a real case. Related material includes [the balance sheet](/guides/balance-sheet/) and [profit versus cash](/guides/profit-vs-cash/). The analyst’s conclusion should preserve uncertainty in the disclosures rather than create false precision with one number.
A risk scenario must not replace the reported estimate
External analysis may use a more severe outcome than the recognised amount. Label it as the analyst’s assumption. It is not a new accounting figure and does not prove that the original estimate was wrong. Otherwise a reader sees a precise number without understanding that it answers a different question: not “what was recognised?” but “what happens under the selected adverse event?”
For litigation, state separately the maximum claimed amount, recognised estimate and disclosed uncertainty, when available. The claim maximum may not equal expected fulfilment, and the recognised amount may not include every possible outcome. If data are insufficient, do not invent probabilities merely to calculate a weighted average.
For a warranty portfolio, statistics across many similar events may be useful. But changes in product quality, design or repair cost can make past experience less representative. Analytical review looks for those changes and for the sequence of revisions, rather than applying one constant percentage to every year.