Present obligation
For an IAS 37 provision, the obligation may be legal or constructive and must result from an obligating event that leaves no realistic alternative to settlement. Recognition additionally requires a probable outflow of resources and a reliable estimate. Future expenditure that the entity can avoid through its future actions does not itself create a present obligation. Distinguish an obligation’s existence from the probability and measurement tests for recognition.
Worked example
Goods sold with a binding warranty create a present obligation to address valid defects arising from those sales. The seller then estimates the provision if a probable outflow and reliable estimate exist.
Common mistake
Treating management’s intention to incur future expenditure as a present obligation, or assuming a probable future operating loss is sufficient.
Where it appears in your exams
| Qualification | Exam | Relationship | Period |
|---|---|---|---|
| ACCA | FR | Direct | September 2026–June 2027 |
| ACCA | SBR | Direct | September 2026–June 2027 |