When is a provision recognized under IAS 37?

A provision is recognized under IAS 37 when there exists a present obligation resulting from a past event, it is probable that an outflow of resources will be required to settle that obligation, and the amount can be estimated reliably. This definition reflects the need for certainty regarding both the existence of the obligation and the expectation of the associated costs.

This recognition criterion ensures that provisions are not only established when costs are anticipated but also that those costs can be quantified to some extent, aligning with the principles of prudence and reliability in financial reporting. By requiring a reliable estimate, IAS 37 seeks to ensure that the financial statements reflect a true and fair view of the entity's obligations, which is essential for users of the financial statements in making economic decisions.

The inclusion of these conditions aims to avoid recognizing provisions that may not materialize, maintaining the integrity of financial reporting. Other options presented do not meet the criteria set by IAS 37; for example, merely disclosing, paying an expense, or waiting until the end of the financial year does not align with the recognition criteria for provisions.