Recognising a provision because of a constructive obligation

Scenario 1; Environmental policy – contaminated land

An entity in the oil industry operates in a country with no environmental legislation. However, it has a widely published environmental policy in which it undertakes to clean up all contamination that it causes and it has a record of honouring this published policy. During the period the entity causes contamination to some land in this country.

In these circumstances, the contamination of the land gives rise to a constructive obligation because the entity (through its published policy and record of honouring it) has created a valid expectation on the part of those affected by it that the entity will clean up the site. [IAS 37 Appendix C, Example 2B].

Scenario 2; Refunds policy – product returns

A retail store has a generally known policy of refunding purchases by dissatisfied customers, even though it is under no legal obligation to do so.

In these circumstances, the sale of its products gives rise to a constructive obligation because the entity (through its reputation for providing refunds) has created a valid expectation on the part of customers that a refund will be given if they are dissatisfied with their purchase. [IAS 37 Appendix C, Example 4].