ACCA FR December 2026: Provision or Contingent Liability? The IAS 37 Test That Decides Your Marks

Not every possible bill belongs in your FR answer. A provision needs a present obligation, a probable outflow and a reliable estimate. Miss one test and you disclose instead, or say nothing at all.

Where FR students slip on IAS 37

IAS 37 is a favourite for both Section B scenarios and the 20-mark Section C questions, because it forces a judgement rather than a calculation. The examining team repeatedly flags the same weakness across FR: candidates recognise the topic but apply the wrong threshold, or list the criteria without applying them to the facts in the scenario.

The recognition test has three parts, and all three must be met: a present obligation (legal or constructive) arising from a past event, a probable outflow of economic benefits (more likely than not), and a reliable estimate of the amount. Fail the first or second and you have, at most, a contingent liability. Fail only the third and it is also treated as a contingent liability, disclosed rather than recognised.

Contingent liabilities are disclosed unless the chance of outflow is remote. Contingent assets are the mirror image and the asymmetry catches people out: you only recognise an asset when the inflow is virtually certain, and you only disclose it when the inflow is probable.

Restructuring is the classic trap. A board decision alone creates no obligation. You need a detailed formal plan and a valid expectation in those affected, either by starting implementation or by announcing the main features, before the reporting date. Future operating losses are never provided for.

Worked example

A customer sues for $400,000 after year end. Lawyers say the company will probably lose, and the event causing the claim happened before the reporting date.

Wrong answer: “Disclose a contingent liability of $400,000 because the case has not been decided.”

Correct answer: “There is a present obligation from a past event, an outflow is probable and the amount can be estimated reliably, so IAS 37 requires a provision of $400,000 (best estimate), with the narrative disclosures.” If the lawyers had said the company would probably win, it becomes a contingent liability: disclose only.

What to do

1. Run the three tests in order, in writing. One short sentence per test, tied to a fact from the scenario. That is where the marks sit.

2. Name the outcome in IAS 37 language. “Provision”, “contingent liability – disclose”, or “remote – no disclosure”. Vague wording like “mention it in the notes” scores nothing.

3. Check the date and the plan for restructuring. Was the plan announced or started before the year end? If not, no provision, whatever the board minutes say.

The bottom line

FR rewards judgement shown on the page. Section C is worth 40 of the 100 marks, and IAS 37 is exactly the sort of topic where a clear, reasoned conclusion beats a long list of rules.

Three tests, one conclusion, then move on.