Product liability provisions

Pharmaceutical and medical device companies face lawsuits when patients allege harm from their products, sometimes thousands of claims consolidated in mass litigation. These provisions can be among the largest and most uncertain liabilities in the accounts, and every word in the disclosure is read by claimants' lawyers. This guide explains when a provision is recognised, how mass claims are estimated, unasserted claims, insurance, legal costs, and the exemption for prejudicial disclosure.

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

Short answer

Product liability provisions are recognised under IAS 37 when a company has a present obligation from a past event, such as harm caused by a medicine it sold, an outflow is probable and the amount can be estimated reliably. For large numbers of similar claims, the provision is the expected value, weighting outcomes by their probabilities. Claims not yet filed are provided for where the product has already been used and further claims are probable and estimable. Insurance recoveries are a separate asset, recognised only when virtually certain. Where a loss is possible but not probable, it is disclosed as a contingent liability. In this guide's example, 1,000 filed claims and 150 expected further claims give a provision of US$ 92 million, with 25 million of insurance shown separately.

At a glance

Recognise when
Obligation, probable, reliable estimate
Mass claims
Expected value
Single large case
Most likely outcome, adjusted
Unfiled claims
If probable and estimable
Insurance
Separate asset if virtually certain
Not probable
Contingent liability disclosure
Product liability provisionsRecognise when: Obligation, probable, reliable estimate; Mass claims: Expected value; Single large case: Most likely outcome, adjusted; Unfiled claims: If probable and estimable; Insurance: Separate asset if virtually certain; Not probable: Contingent liability disclosure.KEY FACTS AT A GLANCEProduct liability provisionsRecognise whenObligation, probable,reliable estimateMass claimsExpected valueSingle large caseMost likely outcome,adjustedUnfiled claimsIf probable and estimableInsuranceSeparate asset ifvirtually certainNot probableContingent liabilitydisclosureTax BakersProduct liability provisionsRecognise when: Obligation, probable, reliable estimate; Mass claims: Expected value; Single large case: Most likely outcome, adjusted; Unfiled claims: If probable and estimable; Insurance: Separate asset if virtually certain; Not probable: Contingent liability disclosure.KEY FACTS AT A GLANCEProduct liability provisionsRecognise whenObligation, probable, reliable estimateMass claimsExpected valueSingle large caseMost likely outcome, adjustedUnfiled claimsIf probable and estimableInsuranceSeparate asset if virtually certainNot probableContingent liability disclosureTax Bakers
Key facts at a glance, as set out in this guide.

When is a product liability provision recognised?

When three conditions are met: a present obligation, legal or constructive, resulting from a past event; a probable outflow of resources; and a reliable estimate. For product liability, the past event is the sale and use of a product that has caused, or is alleged to have caused, harm. Whether an obligation exists, where the company disputes the claims, is judged on all available evidence, including legal advice and the outcome of early trials. If it is more likely than not that an obligation exists, a provision is recognised. See IAS 37 provisions.

Product liability provisions: mass claims over a medicine

A company faces 1,000 filed claims alleging that one of its medicines caused harm. Based on similar litigation and its settlement programme, it expects 40% of claims to be settled, at an average of US$ 0.20 million, and the rest dismissed. It expects 150 further claims from patients who used the medicine before it was withdrawn, on the same terms. Its insurers have confirmed cover of 25 million for these claims.

Product liability provision and insurance (US$ million)Product liability provision and insurance (US$ million)80Filedclaims+12Expected furtherclaims92Provision
Insurance of 25 million is a separate asset, not a deduction.
US$ millionCalculationAmount
Filed claims, expected value1,000 x 40% x 0.2080
Expected further claims150 x 40% x 0.2012
Provision92
Insurance recovery, separate assetVirtually certain25

The provision is presented gross at 92 million, with the insurance recovery as a separate asset of 25 million; in profit or loss, the expense may be shown net, at 67 million. If settlements take several years, the provision is discounted where the effect is material.

How is the provision measured?

At the best estimate of the amount required to settle the obligation. For a large population of similar claims, that is the expected value, weighting each outcome by its probability. For a single large case, it is usually the most likely outcome, adjusted if other outcomes are mostly higher or lower. Estimates draw on settlement history, verdicts in test cases, claim profiles and specialist advice, and are updated as litigation develops.

Should unasserted claims, not yet filed, be provided for?

Where patients have already used the product and the company expects further claims based on experience, such as advertising by claimants' lawyers or a product recall, the past event has occurred for those patients and a provision is recognised for the claims that are probable and can be estimated. Claims that might arise from future use of a product still on sale are not provided for, because the past event has not happened yet.

How are insurance and legal costs treated?

Expected recoveries from insurers or other parties are recognised as a separate asset only when it is virtually certain they will be received, and never more than the provision. Disputes with insurers over coverage often prevent recognition. Practice varies on legal defence costs: some companies include expected costs of defending claims in the provision, others expense them as incurred; the policy should be disclosed and applied consistently.

What must be disclosed, and when can disclosure be limited?

For provisions, the movements in the year, the nature of the obligation, the expected timing and the major uncertainties. For contingent liabilities, the nature and, where practicable, an estimate of the financial effect. In extremely rare cases, where disclosure could seriously prejudice the company's position in a dispute, it can omit the details but must disclose the general nature of the dispute and the reason. See contingent liabilities.

How does US GAAP differ?

ASC 450 recognises a loss contingency when it is probable, meaning likely to occur, which is a higher threshold than more likely than not, and reasonably estimable. Where a range is estimated and no amount is more likely, US GAAP accrues the low end of the range, while IAS 37 uses the expected value or midpoint. See IAS 37 vs ASC 450 and pharma accounting.

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Questions people ask

When is a product liability provision recognised under IAS 37?

When there is a present obligation from the past sale and use of the product, an outflow is probable and the amount can be estimated reliably.

How are mass product liability claims measured?

At the expected value, weighting outcomes such as dismissal and settlement by their probabilities across the population of claims.

Are claims not yet filed provided for?

Yes, for patients who have already used the product, where further claims are probable and can be estimated.

Can insurance recoveries be netted against the provision?

Not in the balance sheet. They are a separate asset recognised only when virtually certain; the expense may be shown net.

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 8, 2026, confirm the figures with the source before you rely on them.

IAS 37IAS 37 provisions explainedIAS 37Contingent liabilities and contingent assetsPharmaPharma accounting: the key IFRS issues

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