Businesses operating in regulated sectors such as mining, infrastructure, or manufacturing are frequently required to provide undertakings or commitments as part of obtaining statutory or environmental clearances. These commitments often involve expenditure towards conservation, mitigation, or compliance activities to be undertaken during project execution or operations.
From an accounting perspective, a key consideration arises: when should such commitments translate into a recognised liability in the financial statements under the Indian Accounting Standards (Ind AS)?
Conceptual Basis under Ind AS 37
The recognition and measurement of Statutory and Environmental obligations are governed by Ind AS 37 – Provisions, Contingent Liabilities and Contingent Assets, which defines a provision as a liability of uncertain timing or amount.
A provision shall be recognised only when all the following three conditions are met:
- There exists a present obligation (legal or constructive) as a result of a past event;
- It is probable that an outflow of resources embodying economic benefits will be required to settle the obligation; and
- A reliable estimate of the amount can be made.
If any of the above criteria are not satisfied, recognition is not appropriate, though disclosure may still be necessary.
Understanding the “Present Obligation”
The cornerstone for recognition lies in determining whether a present obligation exists as of the reporting date.
A legal obligation derives from:
- A contractual agreement;
- Legislative requirements; or
- Other operations of law.
However, the existence of legislation or regulatory conditions alone does not create an obligation. The obligation arises only when the event to which the law applies has occurred, i.e., when the entity undertakes actions that trigger the enforceable duty.
For example, when an entity provides undertakings to carry out certain activities as a condition to obtain a clearance, those undertakings represent future commitments rather than existing obligations. Until such activities commence and the underlying event occurs, the entity retains the ability to avoid the expenditure by deferring or altering future actions. Hence, no liability exists at that stage.
Future Costs versus Existing Liabilities
Ind AS 37 expressly prohibits recognition of provisions for costs to be incurred to operate in the future.
Where the future expenditure can be avoided through a change in operations, such costs represent future operating expenditure, not present obligations.
Accordingly:
- Expenditure to be incurred in compliance with statutory conditions post commencement of operations qualifies as a future cost; and
- Only those obligations arising from past events existing independently of future actions should be recognised as provisions.
In essence, if an entity has not yet caused an environmental or statutory condition requiring rectification, any commitment to perform future activities remains a disclosable commitment—not a recognised liability.
Timing of Liability Recognition
Determining the timing of recognition requires identification of the obligating event — the point at which the entity no longer has a realistic alternative but to settle the obligation.
In practice:
- Before commencement of operations or execution of the primary agreement, commitments remain capital or revenue commitments requiring disclosure only.
- After commencement of operations, when activities that give rise to statutory or environmental responsibilities begin, the obligation becomes present and a provision must be recognised.
The assessment of when this point is reached involves management judgment based on specific facts, legal conditions, and enforceability of undertakings.
Disclosure and Reporting Requirements
Where no liability is recognised, Ind AS nonetheless mandates adequate disclosure in the notes to accounts.
Entities should disclose:
- Capital or revenue commitments relating to future obligations;
- Contingent liabilities where an outflow of resources is possible but not probable; and
- Nature and estimated amount of significant future expenditures arising from statutory or environmental conditions.
Transparent disclosure ensures compliance, provides clarity to stakeholders, and reflects prudent financial reporting without overstating liabilities.
Author’s comments:
The recognition of statutory and environmental obligations under Ind AS requires careful evaluation of the obligating event and the timing of recognition.
While undertakings or commitments given to regulatory authorities may be legally binding, they do not automatically result in an accounting liability until a present obligation arises from a past event.
Premature recognition may distort financial statements, whereas timely and accurate recognition—coupled with adequate disclosure—ensures adherence to the principles of faithful representation and prudence embedded within the Ind AS framework.
In summary, under Ind AS 37: A liability is recognised only when the obligation has become unavoidable and enforceable, not merely because it has been committed.
Disclaimer:
This blog is intended to provide a general understanding of accounting principles relating to recognition of statutory and environmental obligations under Ind AS. It should not be construed as professional advice. For specific accounting treatments, financial reporting implications, or audit considerations, separate professional consultation is recommended.
This article draws upon conceptual guidance under Ind AS 37 – “Provisions, Contingent Liabilities and Contingent Assets,” as interpreted in light of the Expert Advisory Committee (EAC) opinion issued by the Institute of Chartered Accountants of India (ICAI) in September 2025.