When can a company recognize a restructuring provision, and how is it measured?

You are correct — the recognition criteria for restructuring provisions under IAS 37 are deliberately strict to prevent companies from using provisions to manage earnings. A restructuring provision can only be recognized when specific conditions are met.

IAS 37 Recognition Criteria for Restructuring:

A provision is recognized when:

1. There is a detailed formal plan identifying: the business or part affected, principal locations, approximate number of employees to be compensated for termination, the expenditures to be undertaken, and when the plan will be implemented.
2. The entity has raised a valid expectation in those affected that it will carry out the restructuring — either by starting implementation or announcing the main features to those affected.

What Qualifies as Restructuring:

• Sale or termination of a line of business
• Closure of business locations
• Changes in management structure
• Fundamental reorganizations that affect the nature and focus of operations

What Does NOT Qualify:

• Routine employee turnover
• Ongoing training costs
• Relocating continuing activities
• Future operating losses (these are never provisions — they indicate potential impairment)

Worked Example — Kessler Pharmaceuticals:

In November 2025, Kessler's board approves a detailed plan to close its Dublin research facility:

• 85 employees will be terminated with severance packages
• Lease termination costs = $1,200,000
• Equipment relocation costs = $340,000
• Severance = $2,800,000
• Total restructuring = $4,340,000

On December 5, 2025, Kessler announces the plan to affected employees and begins implementation.

Measurement Rules:

The provision should include ONLY the direct expenditures necessarily entailed by the restructuring:

• Employee termination benefits
• Contract termination costs (leases, supply agreements)
• Costs to relocate or retrain employees that are part of the restructuring

Excluded from the provision:

• Retraining or relocating continuing staff
• Marketing costs
• Investment in new systems or distribution networks
• Future operating losses of the restructured unit

US GAAP Differences:

Under ASC 420, the recognition trigger is slightly different. Employee termination benefits are recognized when they are communicated to employees AND the amounts are estimable. One-time benefits require a plan that identifies the number of employees, their roles, and their expected termination dates.

Exam Tip: A common exam trap is including future operating losses in the restructuring provision. IAS 37 explicitly prohibits this — expected future losses indicate potential impairment, not a provision.

For more on provisions and contingencies, explore our CFA Level I FRA course.