Restructuring provisions

Closing a factory, exiting a market or reorganising a business all raise the same question: when can the costs be provided for, and which ones? IAS 37 is strict on both, to stop companies front-loading future costs. This guide explains the two conditions and works through a factory closure.

By Mirza Fahad Baig, Chartered Accountant. Reviewed by Hamza Fida, Chartered Accountant. 3 minute read.

Short answer

A restructuring provision under IAS 37 is recognised only when a company has a constructive obligation: a detailed formal plan identifying the business, locations, employees affected, costs and timing, and a valid expectation in those affected, created by starting to implement the plan or announcing its main features to them. The provision includes only direct expenditures necessarily entailed by the restructuring and not associated with ongoing activities, such as redundancy costs; it excludes retraining, relocation, marketing and future operating losses.

At a glance

Obligation
Constructive, from plan plus announcement
Plan
Detailed and formal
Expectation
Implementation started or announced
Include
Direct expenditures only
Exclude
Retraining, relocation, future losses
Sale of a business
Only once a binding agreement exists
Restructuring provisionsObligation: Constructive, from plan plus announcement; Plan: Detailed and formal; Expectation: Implementation started or announced; Include: Direct expenditures only; Exclude: Retraining, relocation, future losses; Sale of a business: Only once a binding agreement exists.KEY FACTS AT A GLANCERestructuring provisionsObligationConstructive, from planplus announcementPlanDetailed and formalExpectationImplementation started orannouncedIncludeDirect expenditures onlyExcludeRetraining, relocation,future lossesSale of a businessOnly once a bindingagreement existsTax BakersRestructuring provisionsObligation: Constructive, from plan plus announcement; Plan: Detailed and formal; Expectation: Implementation started or announced; Include: Direct expenditures only; Exclude: Retraining, relocation, future losses; Sale of a business: Only once a binding agreement exists.KEY FACTS AT A GLANCERestructuring provisionsObligationConstructive, from plan plus announcementPlanDetailed and formalExpectationImplementation started or announcedIncludeDirect expenditures onlyExcludeRetraining, relocation, future lossesSale of a businessOnly once a binding agreement existsTax Bakers
Key facts at a glance, as set out in this guide.

When is a restructuring provision recognised?

Can a restructuring provision be recognised?Can a restructuring provision be recognised?Is there a detailed formal planfor the restructuring?NoNo provisionYesHas it been announced to thoseaffected, or implementation started?NoNo provision yetYesRecognise a provision for direct costs
Both conditions must be met by the reporting date.

The plan must identify at least the business or part of it concerned, the principal locations affected, the location, function and approximate number of employees who will be compensated for termination, the expenditures that will be undertaken, and when the plan will be implemented. A board decision alone, before the year end, does not create an obligation unless it has been communicated to those affected or implementation has started, such as dismantling plant or selling assets.

Implementation should begin as soon as possible and be completed in a timeframe that makes significant changes to the plan unlikely. A plan announced but not due to start for years does not create a valid expectation.

Which costs go into the provision?

Included: direct expendituresExcluded
Redundancy and termination paymentsRetraining or relocating continuing staff
Penalties for cancelling contractsMarketing
Costs of closing sites, such as onerous non-lease costsInvestment in new systems and distribution networks
Future operating losses, unless onerous contracts
Expected gains on asset disposals, which are not netted off

A worked example: closing a factory

On 1 December, the board approves a detailed plan to close a factory by June and announces it to employees and their union on 15 December. At the 31 December year end, the costs are estimated as follows.

CostCU thousandIn the provision?
Redundancy payments to 120 employees500Yes
Penalty for ending a supply contract early80Yes
Retraining staff moving to another site60No
Relocating equipment to the other site40No
Operating losses until closure120No
Restructuring provision580

Had the announcement been made on 15 January, after the year end, there would be no provision at 31 December, only disclosure as a non-adjusting event. The factory's assets are tested for impairment separately; a leased building is dealt with through the right-of-use asset.

What about leased sites that are closed?

A leased factory or store is on the balance sheet as a right-of-use asset under IFRS 16, so closing it is reflected by testing that asset for impairment, not by a restructuring provision for future rent. Only non-lease costs that become unavoidable, such as service charges for a vacated building, may be included in the provision as onerous contract costs.

What must be disclosed?

The carrying amount and movements of the restructuring provision, a description of the plan, the expected timing of payments and the uncertainties. A restructuring announced after the year end is disclosed as a non-adjusting event if material.

Common mistakes

  • Providing at the board decision date, before anyone affected has been told.
  • Including retraining, relocation or new systems costs, which relate to the ongoing business.
  • Netting expected gains on selling assets against the provision.
  • Keeping an unused provision after the plan changes, instead of reversing it.

What about selling an operation?

No obligation arises for the sale of an operation until the company is committed to it by a binding sale agreement, even if it has announced its intention to sell. Until then the company could change its mind. Assets held for sale are dealt with under IFRS 5.

How does IAS 19 interact?

Termination benefits are recognised under IAS 19 at the earlier of when the company can no longer withdraw the offer and when it recognises related restructuring costs under IAS 37. In practice the two usually coincide. See IAS 37 explained and onerous contracts.

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Questions people ask

When is a restructuring provision recognised under IAS 37?

When there is a detailed formal plan and the company has raised a valid expectation in those affected, by starting implementation or announcing the plan's main features.

What costs are included in a restructuring provision?

Only direct expenditures necessarily entailed by the restructuring and not associated with ongoing activities, such as redundancy payments and contract penalties.

Are future operating losses included in a restructuring provision?

No, unless they arise from onerous contracts.

Is a board decision enough for a restructuring provision?

No. The plan must also be announced to those affected or implementation must have started by the reporting date.

Sources

Every fee, date and rule on this page was taken from these official and primary sources.

  1. IFRS Foundation: IAS 37 Provisions, Contingent Liabilities and Contingent Assets

Rules and fees change. If you are reading this long after October 4, 2026, confirm the figures with the source before you rely on them.

IAS 37IAS 37 provisions explainedIAS 37Onerous contractsIAS 37Contingent liabilities and contingent assets

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This guide is general information. It is not tax or legal advice for your situation.