In many financial statements today, the numbers look reassuring. Profits are stable, balance sheets appear strong, and liabilities seem manageable. Yet beneath these clean figures often lies a quieter, more uncomfortable reality: risks that exist, obligations that are likely, and liabilities that remain unrecorded.

This is why IAS 37—Provisions, Contingent Liabilities, and Contingent Assets—is becoming increasingly relevant in 2026. While not a new accounting standard, it now sits at the critical intersection of litigation, environmental accountability, contract risk, and regulatory scrutiny. More importantly, it raises a fundamental question: How honest are financial statements about the risks companies already face?

IAS 37 governs when companies must recognize provisions for obligations whose timing or amount is uncertain. The principle is simple but frequently misunderstood. A provision must be recognized when there is a present obligation arising from past events, an outflow of resources is probable, and the amount can be reliably estimated.

Certainty is not required—judgment is. That judgment, however, is where the problems often begin.

One of the most common issues in practice is management’s reluctance to recognize provisions. Legal claims are frequently dismissed as "not final." Environmental costs are deferred because they are "still being studied." Loss-making contracts are ignored in the hope that conditions will improve. While such positions may feel commercially convenient, they run counter to the purpose of IAS 37, which is to ensure that risks are reflected when they become likely, not just when they become unavoidable.

Litigation serves as a clear example. Companies often argue that because a case is ongoing, no provision is necessary. Yet accounting standards do not wait for court decisions. They require an assessment of probability based on available evidence. If a legal claim is more likely than not to result in an outflow, ignoring it does not make the risk disappear—it merely shifts the burden of surprise to investors, lenders, and other stakeholders.

Environmental obligations are another growing pressure point. As regulatory expectations and public scrutiny increase, companies are making more explicit commitments related to cleanup, rehabilitation, and environmental responsibility. These commitments can create constructive obligations even before regulators impose formal penalties. In 2026, environmental risks are no longer hypothetical. They are measurable, increasingly enforceable, and closely watched. Failing to recognize related provisions may undermine not only financial credibility but also sustainability claims.

Onerous contracts present a similar challenge. Many businesses entered into long-term agreements under cost assumptions that no longer hold. Inflation, supply chain disruptions, and fixed-price commitments have turned previously profitable contracts into future losses. IAS 37 requires companies to recognize provisions when the unavoidable costs of meeting contractual obligations exceed the expected benefits. Delaying recognition does not protect profitability; it merely postpones the reckoning.

Regulators and auditors are paying closer attention to these areas, and rightly so. In an environment of economic uncertainty, the understatement of liabilities can distort decision-making and misrepresent financial health. Increasingly, aggressive optimism is no longer viewed as a reasonable judgment call; it is seen as a risk.

The deeper issue is not technical compliance but trust. Financial statements are meant to tell a company’s economic story—not just what has already happened, but what is likely to happen next. Provisions are not admissions of failure; they are acknowledgments of reality. Transparent recognition of obligations allows users of financial statements to assess resilience, preparedness, and governance quality.

In many cases, companies worry that recognizing provisions will alarm stakeholders. In practice, the opposite is often true. Markets are generally more forgiving of disclosed risks than of unexpected losses. A well-explained provision signals prudence, discipline, and accountability. Silence, on the other hand, invites doubt.

As 2026 approaches, IAS 37 deserves renewed attention—not because it introduces new rules, but because it tests how willing organizations are to confront uncomfortable truths. In an era of heightened scrutiny and sustainability expectations, what companies choose not to record may speak louder than the numbers they proudly present.

In financial reporting, transparency is not about pessimism. It is about credibility. And credibility, once lost, is far harder to provision for.

Floyd C. Paguio, CPA, MBA is the Chairman of Paguio, Dumayas & Associates, CPAs (PDAC), the Philippine member firm of PrimeGlobal International, and the President of KCD College of Accountancy in Alaminos, Laguna. He is also a member of the PICPA Media Affairs Committee.