Provisions & Contingencies
Treatment under IFRS
A provision is recognised when a present obligation is probable (more than 50%), an outflow of resources is probable and a reliable estimate can be made. It is measured at the best estimate.
- Criteria: a present obligation, probability > 50%, and a reliable estimate.
- Measurement: best estimate (expected value for a large population; most likely amount for a single obligation).
- Long-term provisions must be discounted.
- Contingent liabilities are disclosed in the notes only (not recognised on the balance sheet).
- Restructuring provisions: only where there is a detailed plan and the decision has been communicated.
Treatment under German GAAP (HGB)
Provisions under § 249 HGB are recognised for uncertain liabilities and onerous (pending) contracts. They are measured at the settlement amount (§ 253 (1) sentence 2 HGB).
- § 249 (1) HGB: mandatory for uncertain liabilities and onerous pending contracts.
- § 253 (1) sentence 2 HGB: measured at the settlement amount required according to prudent commercial judgement (including future price and cost increases).
- § 253 (2) HGB: provisions with a remaining term > 1 year are discounted at the average market rate of the past 7 financial years.
- § 249 (2) HGB: pure expense provisions have generally been prohibited since BilMoG.
Key differences
- HGB: settlement amount including future cost increases; IFRS: best estimate at the reporting date.
- Provisions for onerous contracts are recognised under both HGB and IAS 37, though the recognition and measurement details may differ.
- Discounting: HGB uses the Bundesbank 7-year average rate vs. IFRS a current rate matched to the term.
- Restructuring provisions: similar in principle, but IFRS has more detailed recognition conditions.
Example
Worked example
Assumptions: A legal decommissioning/environmental obligation already exists and must be settled in 10 years at an expected €1,200,000. Under both systems this settlement amount reflects expected future cost increases (HGB: § 253 (1) sentence 2; IFRS: best estimate, IAS 37.36). The only difference is the discount rate: IFRS uses a current, maturity-matched market rate (assumed 3.5%, IAS 37.47); HGB uses the average market rate of the last 7 financial years (assumed 1.5%, § 253 (2) HGB). Which rate is higher depends on the interest-rate environment. The obligation here is not linked to a depreciable asset (it arises in full immediately). All amounts in euros, rounded; rounding differences are absorbed in the final year.
Step 1 – Discount rate and size of the provision
Provision = €1,200,000 ÷ (1 + rate)10. A lower rate produces a higher provision at the reporting date.
| System | Discount rate | Provision at recognition |
|---|---|---|
| IFRS (current market rate) | 3.5% | 850,701 |
| HGB (7-year average) | 1.5% | 1,034,001 |
| Difference | — | 183,300 |
Step 2 – Unwinding of the discount to settlement
Both provisions are accreted each year and reach the same settlement amount of €1,200,000. The initial measurement difference closes completely.
| Year | IFRS (3.5%) | HGB (1.5%) | Difference |
|---|---|---|---|
| Recognition | 850,701 | 1,034,001 | 183,300 |
| 1 | 880,476 | 1,049,511 | 169,035 |
| 2 | 911,293 | 1,065,254 | 153,961 |
| 3 | 943,188 | 1,081,233 | 138,045 |
| 4 | 976,200 | 1,097,451 | 121,251 |
| 5 | 1,010,367 | 1,113,913 | 103,546 |
| 6 | 1,045,730 | 1,130,622 | 84,892 |
| 7 | 1,082,331 | 1,147,581 | 65,250 |
| 8 | 1,120,213 | 1,164,795 | 44,582 |
| 9 | 1,159,420 | 1,182,267 | 22,847 |
| 10 (settlement) | 1,200,000 | 1,200,000 | 0 |
Step 3 – Journal entries
At recognition – the provision is recognised in full (credit side: expense, or for asset-linked obligations the cost of the asset – see key takeaway):
| Account | Debit | Credit |
|---|---|---|
| IFRS: Expense | 850,701 | |
| Provision | 850,701 | |
| HGB: Expense | 1,034,001 | |
| Provision | 1,034,001 |
Unwinding, year 1 – the unwinding is an interest expense under both systems (HGB: presented within the financial result, § 277 (5) sentence 1 HGB):
| Account | Debit | Credit |
|---|---|---|
| IFRS: Interest expense (850,701 × 3.5%) | 29,775 | |
| Provision | 29,775 | |
| HGB: Interest expense (1,034,001 × 1.5%) | 15,510 | |
| Provision | 15,510 |
Key takeaway
The discount rate is the key lever: the lower HGB rate (7-year average) currently produces a higher provision and therefore an earlier expense; the higher IFRS market rate gives a lower initial provision but a higher annual unwinding charge. By the settlement date both converge to the identical settlement amount of €1,200,000. Which system measures higher at the outset depends on the rate environment. Important exception for asset-linked decommissioning obligations: under IFRS the provision amount is capitalised as part of the asset's cost on initial recognition (IAS 16.16(c)) and depreciated over its useful life; HGB does not allow this capitalisation and instead builds the provision ratably over the period of use (accrued provision).