Under IAS 37, what is a provision?

A provision, as defined under IAS 37, refers to a liability of uncertain timing or amount. This accounting standard deals with provisions, contingent liabilities, and contingent assets, specifying that a provision must be recognized when an entity has a present obligation (legal or constructive) that arises from past events, for which it is probable that an outflow of resources will be required to settle the obligation, and the amount can be estimated reliably.

The characteristic of uncertainty in both timing and amount is crucial because it differentiates provisions from other liabilities. In the case of provisions, while the entity acknowledges a liability exists, it cannot precisely determine when the liability will be settled or the exact amount that will be required for settlement. This is a common scenario in accrual accounting where management must rely on estimates and judgments based on available information.

This understanding is essential for accurately reflecting an entity's financial position and performance, ensuring that financial statements provide a faithful representation of an organization's obligations and potential future impacts on its cash flows.