Ind AS 37 Provisions, Contingent Liabilities and Contingent Assets: A Practitioner Guide for FY 2026-27
Ind AS 37 (Provisions, Contingent Liabilities and Contingent Assets) is the Indian Accounting Standard that prescribes when and how to recognise provisions and disclose contingent liabilities or contingent assets in financial statements.
The Ministry of Corporate Affairs notified Ind AS 37 via the Companies (Indian Accounting Standards) Rules, 2015. It became effective on a voluntary basis from 1 April 2015 and mandatory from 1 April 2016 for Phase I companies. Ind AS 37 supersedes AS 29 for Ind AS-applicable entities.
For FY 2026-27, manufacturing companies must pay close attention to warranty provisions and environmental remediation obligations under Ind AS 37. The National Financial Reporting Authority (NFRA) has increased scrutiny on major assumptions disclosed for these provisions.
Ind AS 37 at a Glance
Ind AS 37 sets out the principles for recognising provisions and disclosing contingent liabilities or contingent assets. Its core principle is that only present obligations arising from past events with probable outflows are recognised as provisions. This standard primarily serves finance teams in listed companies and statutory auditors responsible for true and fair financial reporting.
| Field | Value |
|---|---|
| Standard Number | Ind AS 37 |
| Full Name | Provisions, Contingent Liabilities and Contingent Assets |
| Issuing Body | ICAI (Accounting Standards Board) |
| Notified By | MCA, Companies (Indian Accounting Standards) Rules, 2015, dated 16 February 2015 |
| Effective Date | 1 April 2015 (voluntary), 1 April 2016 (mandatory Phase I) |
| Supersedes | AS 29 (Provisions, Contingent Liabilities and Contingent Assets) for Ind AS-applicable entities |
| Equivalent Standard | AS 29 ↔ Ind AS 37 ↔ IAS 37 |
| Applies To | All companies required to follow Indian Accounting Standards. Ind AS 37 prescribes recognition criteria and measurement bases for provisions, contingent liabilities, and contingent assets, together with required disclosures. |
What is Ind AS 37: Provisions, Contingent Liabilities and Contingent Assets?
Ind AS 37 defines how an entity must account for obligations arising from past events when the timing or amount is uncertain. The standard requires recognition of a provision only when a present obligation exists as a result of a past event, settlement will probably require an outflow of resources, and a reliable estimate can be made.
The Institute of Chartered Accountants of India introduced this standard as part of its convergence with International Financial Reporting Standards (IFRS), specifically aligning with IAS 37. It replaced the earlier Indian GAAP standard (AS 29) to ensure consistency in reporting across global capital markets.
CFOs of listed companies, finance managers in large private limited companies adopting Ind AS, statutory auditors performing audits under SA 700, and CA students preparing for exams all use this standard extensively.
Objective of Ind AS 37
- Ensure that appropriate recognition criteria and measurement bases are applied to provisions, contingent liabilities, and contingent assets.
- Establish that sufficient information is disclosed in the notes to enable users to understand the nature, timing, and amount of provisions and contingencies.
- Distinguish between provisions (recognised liabilities of uncertain timing or amount) and contingent liabilities (not recognised but disclosed).
The objective directly supports the “true and fair view” requirement under Section 129 of the Companies Act, 2013 by preventing overstatement or understatement of liabilities or assets through clear rules on recognition versus disclosure.
Who Must Apply Ind AS 37?
Entities covered
Ind AS 37 applies mandatorily to all companies required to prepare financial statements under Indian Accounting Standards as per the Ministry of Corporate Affairs roadmap:
| Applicability Category | Coverage Period |
|---|---|
| Phase I | Listed entities with net worth ≥ Rs 500 crore; unlisted with net worth ≥ Rs 500 crore, from FY 2016-17 |
| Phase II | All listed entities; unlisted with net worth ≥ Rs 250 crore, from FY 2017-18 |
| Voluntary adopters | Any company may opt-in earlier |
All subsidiaries/associates/joint ventures of such companies must also apply Ind AS 36 where group reporting requires consolidation under Schedule III to the Companies Act.
Scope exclusions
Ind AS 37 does not apply to:
- Items dealt with by other standards such as:
- Income taxes (Ind AS 12)
- Employee benefits (Ind AS 19)
- Financial instruments (Ind AS 109)
- Revenue contracts (Ind AS 115)
- Insurance contracts (Ind AS 117)
- Provisions specifically excluded by other standards
When the standard does not apply
Each exclusion above is covered as follows:
Income tax-related provisions are accounted under Ind AS 12. Employee benefit obligations fall within Ind AS 19. Financial instrument-related exposures are governed by Ind AS 109. Revenue contract obligations are measured using Ind AS 115. Insurance contracts are scoped into Ind AS 117.
Key Definitions under Ind AS 37
| Term | Definition |
|---|---|
| Provision | A liability where timing or amount is uncertain. |
| Liability | Present obligation from past events expected to result in outflow of resources. |
| Contingent liability | Possible obligation confirmed by future events not wholly within entity’s control; or present obligation not recognised due to probability or measurability limits. |
| Contingent asset | Possible asset confirmed only by future events not wholly within entity’s control. |
| Constructive obligation | Obligation arising from established practice or public commitment creating valid expectation among affected parties. |
| Onerous contract | Contract where unavoidable costs exceed economic benefits expected from it. |
Recognition and Measurement under Ind AS 37
When to recognise
An entity recognises a provision when all three conditions are met as per Para 14:
A present obligation exists, either legal or constructive, resulting from a past event.
It is probable that an outflow of resources will be required to settle it.
The amount can be estimated reliably.
If any condition fails, e.g., probability threshold not met, no provision is recognised; instead disclose as a contingent liability if appropriate.
A present legal obligation arises through contract or law; constructive obligations arise when an entity’s actions create valid expectations among stakeholders that it will discharge certain responsibilities even without legal enforceability.
For example: If Krishna Steel Industries issues a public statement promising remediation after an environmental incident, even before regulatory enforcement, it creates a constructive obligation requiring provision if probable outflow can be reliably estimated.
Initial measurement
The initial amount recognised as provision is the best estimate required to settle the present obligation at period-end (Para 36). This estimate reflects what management would rationally pay either to settle directly or transfer liability to a third party at reporting date.
Where time value of money is material, typically for long-term obligations exceeding one year, discount future cash flows using a pre-tax rate reflecting current market rates plus risk premium specific to liability characteristics (Para 45-47).
**Provision = Present Value (PV) of Expected Outflow**
>
PV = Expected Cash Outflow × Discount Factor
Discount Factor = \( \frac{1}{(1 + r)^n} \),
where r = pre-tax discount rate; n = number of years until settlement
Major assumptions about future events affecting amount/timing must be factored into estimation process.
Subsequent measurement
At every reporting date:
Review each provision against current best estimate.
Adjust upward/downward based on new information about expected outflows.
Reverse provision if outflow is no longer probable.
Recognise unwinding of discount on discounted provisions as finance cost in profit or loss.
Use provision only for expenditures originally provided for; do not reallocate unused amounts elsewhere.
Recognise reimbursement asset separately only when virtually certain recovery exists from third party (Para 53).
If Sundaram Infotech Pvt Ltd expects insurance reimbursement against litigation losses but outcome remains uncertain at year-end, no asset is recognised unless virtual certainty threshold is reached.
Provisions vs Contingent Liabilities - The Probable vs Possible Distinction
Recognition hinges on probability assessment:
If outflow is probable (>50%), recognise provision in balance sheet.
If possible but not probable (“between remote and probable”), disclose only as contingent liability in notes; no balance sheet entry required.
If chance is remote (<10%), neither recognition nor disclosure applies except in rare cases involving guarantees.
Constructive obligations matter: Announcing restructuring plans publicly may create valid expectation among employees/customers requiring immediate provision even before legal formalities complete.
Onerous contracts require special attention (Para 66): If unavoidable costs exceed expected benefits, e.g., binding supply agreement now loss-making due to price drop, recognise provision equal to excess cost over benefit immediately upon identification.
In our audit practice we frequently observe confusion between general risk reserves (“rainy day” funds) which are prohibited under Para 14(b), versus legitimate specific obligations that meet all three recognition criteria above.
Worked Examples on Ind AS 37
Example 1: Warranty provision
Sundaram Engineering Pvt Ltd sells products with one-year warranties totalling Rs 100 crore sales in FY 2025-26. Past experience shows warranty claims arise on about three percent of sales at an average cost Rs 800 per unit; eighty percent occur within six months post-sale.
Computation Table
| Item | Amount / Percentage | Computation / Note |
|---|---|---|
| Total sales | Rs 100 crore | Annual turnover |
| Claim rate | Three percent | Based on historical trend |
| Expected claims | Rs 100 crore × three percent | Rs 3 crore |
| Average claim cost | Rs 800 | Per unit |
| Timing | Eighty percent within six months | Remainder by end-year |
Recognise full Rs 3 crore warranty provision at year-end since most claims arise within twelve months; discount impact moderate due to short duration but adjust if material based on cash flow pattern review at each reporting date.
Journal Entry
Dr Warranty Expense (P&L, COGS) Rs 3 crore
Cr Warranty Provision Rs 3 crore
As actual claims paid:
Dr Warranty Provision
Cr Cash / Inventory
Year-end review:
Adjust up/down based on revised claim estimates using latest data available.
Example 2: Litigation, probable outflow
Maharashtra Holdings Ltd faces lawsuit claiming Rs 12 crore damages for alleged breach of contract during FY 2025-26; legal counsel expects adverse outcome likely with best estimate payout Rs 8·50 crore after eighteen months’ litigation process.
Computation Table
| Item | Amount / Percentage | Computation / Note |
|---|---|---|
| Claim filed | Rs 12 crore | As per suit documents |
| Probability assessment | Probable | Legal opinion |
| Best estimate payout | Rs 8·50 crore | Most likely outcome |
| Settlement timeline | Eighteen months | From balance sheet date |
| Discount rate | Eight percent | Pre-tax risk-free + risk premium |
| PV factor | \( \frac{1}{(1+0·08)^{1·5}} \)=0·891 | For one-and-a-half years |
| Discounted provision | Rs 8·50 crore ×0·891=Rs 7·57 crore | To be recognised |
Recognise discounted litigation provision at present value, Rs 7·57 crore, on balance sheet date reflecting time value adjustment over settlement period.
Journal Entry
Dr Litigation Expense (P&L) Rs 7·57 crore
Cr Litigation Provision Rs 7·57 crore
Subsequent periods:
Unwind discount via finance cost until settlement occurs; adjust carrying value if new facts emerge before final cash payment made.
Disclosure Requirements under Ind AS 37
Disclosures under Ind AS 37 are critical for users of financial statements to assess the nature, timing, and uncertainty of provisions and contingencies. Schedule III to the Companies Act, 2013, requires all material provisions, contingent liabilities, and contingent assets to be clearly disclosed in the notes. Transparent disclosure ensures comparability and supports auditor conclusions under SA 700.
| Item | Requirement | Para Reference |
|---|---|---|
| Carrying amount of provisions | At beginning and end of period, with reconciliation showing increases, decreases, used during period, unused reversed | Para 84(a) |
| Brief description of nature of obligation and timing | Of expected outflows | Para 85(a) |
| Major assumptions made | Concerning future events affecting the provision | Para 85(b) |
| Reimbursement expected | Including amount of any asset recognised | Para 85(c) |
| Contingent liabilities | Brief description, estimated financial effect, indication of uncertainties, possibility of any reimbursement (unless remote) | Para 86 |
| Contingent assets | Brief description and estimated financial effect when an inflow of economic benefits is probable | Para 89 |
| Prejudicial information exemption | In extremely rare cases, disclosure can be omitted if it would prejudice the entity's position; the fact and reason must be disclosed | Para 92 |
Auditors must verify that all disclosures required by Ind AS 37 are complete and accurate to support a true and fair view in the audit report.
Common Mistakes & Industry-Specific Considerations
Common errors auditors flag
- Recognising provision for general business risks (e.g., 'risk reserves' for future operating losses), which is prohibited.
- Failing to discount long-term provisions where time value of money is material.
- Recognising contingent gains as provisions or income before they are virtually certain.
- Inadequate disclosure of contingent liabilities with material exposures (off-balance-sheet items).
- Using a provision for purposes other than those for which it was originally recognised.
- Failing to review and update provision estimates each period.
Industry application notes
Manufacturing:
Warranty provisions, environmental remediation, and decommissioning obligations are prevalent. Ind AS 16 governs asset-related decommissioning but measurement updates fall under Ind AS 37. The National Financial Reporting Authority increasingly scrutinises disclosures on major assumptions in this sector.
Pharma and chemicals:
Product liability provisions are common due to regulatory risk. Environmental remediation costs also arise frequently. Litigation provisions can be highly material; companies align these disclosures with Securities and Exchange Board of India (SEBI) material event filings.
Construction and infrastructure:
Onerous contract provisions occur where project costs exceed expected revenues. Public announcements about restructuring or project termination create constructive obligations requiring immediate provision if criteria are met under Ind AS 37.
Ind AS 37 vs AS 29 vs IFRS: Key Differences
The table below compares key requirements across Ind AS 37, AS 29 (Indian GAAP), and IFRS (IAS 37):
| Aspect | AS | Ind AS | IFRS |
|---|---|---|---|
| Recognition threshold | Probable | Probable (more likely than not) | Probable |
| Discounting requirement | Permitted | Required if material (Para 45) | Required if material |
| Constructive obligations | Recognised | Recognised (Para 17) | Recognised |
| Onerous contracts | Specific to AS 7 long-term contracts | Comprehensive Para 66-69 | Same as Ind AS |
| Reimbursement asset | Recognised when virtually certain | Recognised when virtually certain (Para 53) | Same |
India’s Ind AS framework closely follows IAS 37 issued by the International Accounting Standards Board but introduces additional guidance through ICAI educational materials. The main carve-outs relate to cross-references with other Indian standards such as Ind AS 16 for decommissioning costs or Ind AS 115 for revenue contract obligations.
Latest Amendments to Ind AS 37 (FY 2026-27)
No amendments have been notified to Ind AS 37 for FY 2026-27 as of 2026-05-02. The standard continues to apply in its existing form.
Related Standards You Should Know
- [AS 29](/as-29-provisions-contingent-liabilities/), Equivalent provisions standard for non-Ind AS companies.
- [Ind AS 16](/ind-as-16-property-plant-and-equipment/), Decommissioning and restoration obligations included in PPE cost; subsequent measurement of obligation under Ind AS 37.
- [Ind AS 19](/ind-as-19-employee-benefits/), Employee benefits obligations - separate measurement framework.
- [Ind AS 12](/ind-as-12-income-taxes/), Tax provisions follow Ind AS 12, not Ind AS 37.
- [Ind AS 115](/ind-as-115-revenue-from-contracts-with-customers/), Customer contract obligations are separately measured under Ind AS 115; warranties may fall under either standard.
Need Help with Ind AS 37 Compliance?
Patron Accounting LLP assists listed companies, NBFCs, and large private limited companies with full-spectrum compliance on Ind AS 37 Provisions, Contingent Liabilities and Contingent Assets. Our team ensures accurate recognition, measurement, and disclosure aligned with Schedule III requirements.
Our services include:
- Statutory Audit
- Ind AS Advisory
- Financial Reporting & Schedule III
- Disclosure Review
Schedule a 30-minute consultation with our Ind AS team, Pune · Mumbai · Delhi · Gurugram.
Frequently Asked Questions (FAQs)
All companies required to prepare financial statements under Indian Accounting Standards must comply with Ind AS 37. This includes listed entities, large unlisted companies above the net worth threshold notified by the Ministry of Corporate Affairs, their subsidiaries, associates, and joint ventures consolidated per Schedule III.
A provision is recognised when there is a present obligation from past events with probable outflow that can be reliably estimated. A contingent liability arises when an obligation is possible or not probable enough for recognition or cannot be measured reliably, disclosed but not recognised on the balance sheet.
Where time value of money is material, typically for long-term obligations, the provision must be measured at present value using a pre-tax discount rate reflecting current market rates plus risk premium specific to the liability’s characteristics (Para 45).
A constructive obligation arises from established practice or public commitments creating valid expectations among affected parties. If settlement is probable and estimable, such as after a public restructuring announcement, a provision must be recognised even without legal enforceability (Para 17).
Not always. Warranties that provide assurance-type coverage on sold goods typically fall within Ind AS 37. However, service-type warranties or those bundled into customer contracts may require accounting under Ind AS 115 Revenue from Contracts with Customers.
Entities must disclose the nature of litigation obligations, expected timing of outflows, major assumptions used in estimating amounts provided, any reimbursement expected from third parties if virtually certain, along with changes in carrying amounts during the period per Paras 85-86.
Both standards use similar probability thresholds but differ on discounting, Ind AS 37 requires discounting where material; legacy Indian GAAP permitted it but did not mandate. Constructive obligation guidance is more explicit in Ind AS 37 aligning closely with IAS 37.
No. Under Para 33-35 of Ind AS 37, contingent assets are only disclosed when inflow is probable but not recognised until realisation is virtually certain, preventing premature income recognition from uncertain future events.
Auditors frequently observe errors such as failure to update warranty provision estimates based on latest claim experience or inadequate disclosure around environmental remediation assumptions, both areas now subject to increased National Financial Reporting Authority scrutiny.
Yes. Any contract where unavoidable costs exceed economic benefits triggers an onerous contract provision requirement under Paras 66-69 unless another standard specifically applies, for example revenue contracts scoped into Ind AS 115.
About This Article
Reviewed by CA & CS Team · Patron Accounting LLP
Technical reviewer: CA Sundram Gupta, FCA
Last reviewed: 2026-05-02
Sources: ICAI Compendium of Accounting Standards · MCA Notification (Companies (Indian Accounting Standards) Rules, 2015, dated 16 February 2015) · IFRS Foundation