IAS 37Chapter 5Lesson 1
Measuring a provision: the best estimate
Step 1 of 9Learning objectives
Go deeper+3 deeper insights · +1 point of attention
A provision is measured at the best estimate of the expenditure required to settle the obligation at the reporting date: what the entity would rationally pay to settle it or transfer it at that date. For a large population, the outcomes are weighted by their probability (expected value); for a range of equally likely outcomes, the mid-point is used; for a single obligation, the most likely outcome is a starting point, adjusted if the other outcomes are mostly higher or lower. The provision is before tax and takes risks into account, without excess or double counting.
30 minNot started
Learning objectives
- Explain the best estimate: the amount the entity would rationally pay to settle or transfer the obligation at the reporting date, before tax.
- Calculate a provision using the expected value for a large population, and the mid-point of a range of equally likely outcomes.
- Assess, for a single obligation, whether the most likely outcome should be adjusted in the light of the other possible outcomes.
- Take risks and uncertainties into account without excessive provisions or double counting.