How to account for provisions, contingencies, and liabilities under IFRS and US GAAP: Recognition criteria and disclosure requirements
- Graziano Stefanelli
- Sep 12
- 4 min read
Provisions and contingencies represent potential or uncertain liabilities that require careful evaluation and consistent application of recognition thresholds. Both IFRS (IAS 37) and US GAAP (ASC 450, ASC 410) provide frameworks to guide the treatment of legal claims, environmental obligations, restructuring costs, warranties, and other uncertain obligations. Despite their similarities in scope, the standards differ significantly in terms of when liabilities are recognized, how amounts are measured, and the level of disclosure required—differences that can materially affect reported earnings and balance sheet strength.
Provisions are recognized when specific criteria are met and outcomes are probable.
Under IFRS (IAS 37), a provision is recognized when:
There is a present obligation (legal or constructive) as a result of a past event.
It is probable (more likely than not) that an outflow of economic benefits will be required.
The amount can be reliably estimated.
The threshold of “probable” under IFRS corresponds to greater than 50% likelihood. Obligations that do not meet all three criteria are not recognized, though they may still require disclosure as contingent liabilities.
Under US GAAP (ASC 450), an accrual for a loss contingency is made if:
It is probable (interpreted as “likely”) that a liability has been incurred at the reporting date.
The amount of loss can be reasonably estimated.
The key differences lie in the interpretation of “probable” and the treatment of constructive obligations.
Contingent liabilities are disclosed unless remote or not estimable.
Both standards require the disclosure of contingent liabilities—potential obligations that are not recognized in the financial statements because one or more of the recognition criteria are not met.
IFRS allows recognition of constructive obligations—those arising from past practices or public commitments—even if there is no legal obligation, while US GAAP does not.
Measurement under IFRS focuses on expected value, while US GAAP prefers the minimum of the range.
Once a provision is recognized, it must be measured reliably. Here is where the frameworks diverge:
IFRS (IAS 37):
Uses the expected value method, particularly for large populations of similar obligations (e.g., warranties).
If the obligation involves a single outcome, the most likely amount may be used.
US GAAP (ASC 450):
If there is a range of possible losses, and no amount is more likely than the others, the minimum value in the range is accrued.
If one amount is more likely, that amount is accrued.
This often results in more conservative estimates under US GAAP, particularly for litigation-related provisions.
Examples of common provisions include warranties, restructuring, and environmental obligations.
Reimbursements and contingent assets are treated with caution.
In some cases, entities may expect a reimbursement (e.g., from insurance or a third party) related to a recognized provision.
IFRS (IAS 37):
Recognize a separate asset only if it is virtually certain to be received.
Cannot offset provision and reimbursement.
US GAAP:
Similar approach, but disclosure and offsetting rules are more prescriptive.
For contingent assets (e.g., potential legal settlements in favor of the company):
IFRS: Disclose if inflow is probable; recognize only if virtually certain.
US GAAP: Disclose only if inflow is probable; recognition prohibited.
Disclosure requirements aim to provide clarity on risks and uncertainties.
Both IFRS and US GAAP emphasize the importance of disclosing the nature, timing, and estimation uncertainties of provisions and contingencies. Key disclosure items include:
Description of the obligation and expected timing of outflows
Uncertainties and assumptions used in measurement
Expected reimbursements
Reconciliations of provisions (under IFRS)
IFRS (IAS 37) has more comprehensive disclosure requirements, including movements in provisions, while US GAAP focuses more on sensitivity to estimates and litigation risks.
Key differences between IFRS and US GAAP for provisions and contingencies.
Understanding the subtle yet impactful differences between IFRS and US GAAP in handling provisions and contingencies is essential for consistent global reporting, especially in industries with frequent legal exposure, environmental obligations, or large-scale restructuring activities. These decisions directly affect earnings volatility, liability management, and stakeholder trust.
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