Accounting for legal claims: IFRS® Accounting Standards vs US GAAP

From the IFRS Institute – March 3, 2026

Authors: Valerie Boissou; Paulina Kumah

IAS 37¹is one-stop guidance to account for provisions, contingent assets and contingent liabilities under IFRS Accounting Standards. Therefore, there is a single recognition, measurement and disclosure model for obligations such as legal claims and litigations, onerous contracts, restructurings², assurance warranties, non-income tax exposures, environmental provisions and decommissioning.

This contrasts with US GAAP, which has a number of Codification Topics that, in combination, cover the same overall scope as IAS 37. For example, separate Codification Topics deal with asset retirement obligations, environmental obligations, exit and disposal obligations and guarantees. Despite these exclusions, many loss contingencies and gain contingencies fall under the general model in Topic 450³. It is this general US GAAP model that is the subject of this article, focusing on legal claims.

IFRS Accounting Standards and US GAAP have similar, but not identical, recognition thresholds. But let’s align on terminology first. US GAAP speaks of loss contingencies and requires those that meet certain criteria to be recognized – at that point a loss contingency gives rise to a liability. This liability is often referred to as a contingent liability under US GAAP, when IAS 37 calls it a provision. Conversely, IAS 37 uses the term contingent liability to describe an uncertainty that is not recognized. For simplicity, in this article, we will use the term ‘provision’ to refer to a recognized liability.

IFRS Accounting Standards

US GAAP

Recognize a provision when all of the following criteria are met:

A past event gives rise to a present obligation (legal or constructive).
It is probable – i.e. more likely than not – that an outflow of resources (typically a payment) will be required to fulfil the obligation.
The amount can be estimated reliably.

Recognize a provision when all of the following criteria are met:

Like IFRS Accounting Standards, a past event gives rise to a present obligation. However, unlike IFRS Accounting Standards, a constructive obligation is not recognized under the general model in Topic 450.
It is probable that an outflow of resources (typically a payment) will be required to fulfill the obligation. Probable in this context means 'likely to occur', which is a higher threshold than IFRS Accounting Standards. In many cases, this difference will not change the practical outcome, and the threshold will be met under both frameworks.
Like IFRS Accounting Standards, the amount can be estimated reasonably.

If any of these conditions are not met, no provision is recognized. However, if unrecognized, an obligation⁴is disclosed, unless the outflow of resources is remote.

Like IFRS Accounting Standards, if any of these conditions are not met, no provision is recognized. Further, if unrecognized, a present obligation is disclosed unless its occurrence is remote.

Applying these principles to a legal claim, the past event is the event that gives rise to the litigation, rather than the claim itself. For example, in the case of a legal claim filed by a customer injured on the company’s premises, the past event is the actual incident in which the injury happened, which is when the provision should be recognized – not when the claim was filed – assuming the other recognition criteria are met. Before an actual claim is made, the provision or loss contingency represents an ‘unasserted claim’.

In some cases, it may not be clear whether a present obligation exists – e.g. a legal claim that is disputed by the company. In such cases, subject matter experts may be required to determine whether the company is legally liable and estimate the likelihood of an outflow of resources. The assessment considers all available evidence, including post - reporting date events and any other precedents.

Under both IFRS Accounting Standards and US GAAP, the amount recognized as a provision is the best estimate of the expenditure to be incurred. This is the amount that a company would rationally pay to settle the obligation, or to transfer it to a third party, at the end of the reporting period. Given the uncertainties inherent in determining an estimate, best estimates are based on management’s judgment of all possible outcomes and their financial effect and need to factor in relevant past experience with similar transactions.

Differences between IFRS Accounting Standards and US GAAP become apparent when applying the measurement principle. The following is in the context of a legal claim – i.e. a single obligation.

IFRS Accounting Standards	US GAAP
The most likely outcome is generally used to measure a single obligation. However, other outcomes may affect the measurement if they are mostly higher or mostly lower than the most likely amount. For example, if the most likely outcome is that a legal claim will be settled for $100, but the other possible outcomes are mostly higher than $100, then the provision is measured at an amount higher than $100.	Unlike IFRS Accounting Standards, under US GAAP the single most likely outcome within the range is used without considering the other possible outcomes.
If there is a continuous range of possible outcomes and no one point in the range is considered more likely than another point, then the midpoint of the range is taken as the best estimate under IFRS Accounting Standards.	Unlike IFRS Accounting Standards, under US GAAP the low end of the range is used, if all outcomes within the range are equally possible.

	IFRS Accounting Standards	US GAAP
A legal claim has a 75% chance of being settled for $600 and a 25% chance of being dismissed.	$600 (most likely outcome)	$600 (most likely outcome)
A legal claim might be settled between $400 and $600. The most likely outcome of $400 has a 40% probability. Other possible outcomes have the following probabilities: 30% for $500 and 30% for $600	$490 (expected value)¹	$400 (most likely outcome)
A legal claim might be settled between $400 and $600, with all outcomes within the range being equally possible.	$500 (mid - point range)	$400 (low end of range)
Note: 1. The $400 most likely outcome could not be used because the other estimates were all higher; instead, an expected value was used as a better estimate of the expected outcome.

For a legal claim, the related costs that a company expects to incur may be significant – e.g. lawyers’ and experts’ fees. IFRS Accounting Standards do not provide specific guidance on recognizing related costs. However, costs that need to be incurred for business operations in the future cannot be accrued. In our view, the accounting for legal costs depends on whether the company believes that there is a past obligating event.

If a company believes that there is no past obligating event, then it should not recognize a provision for legal costs to be incurred in defending the claim – i.e. they should be expensed as incurred.
If a company concludes that there is a past obligating event, then we believe any incremental costs expected to be incurred in settling the claim should be included when measuring the provision for the legal claim.

In our view, only anticipated incremental costs that are directly related to the settlement or a claim should be included in the measurement or a provision. We believe that allocating future salaries of claims department personnel (full cost approach) to the provision would not be appropriate because they are unlikely to be incremental to any specific claim. However, if an external adviser is engaged to negotiate the settlement of a specific legal claim, then the associated cost would be incremental and included in the measurement of the related provision.

Unlike IFRS Accounting Standards, under US GAAP, the accounting for related legal costs is subject to an accounting policy election. Acceptable accounting policies include expensing related costs as incurred or accruing related costs when they are deemed probable and reasonably estimable.

Under IFRS Accounting Standards, discounting is generally required for provisions that are expected to be settled in the longer term, where the time value of money has a material effect. The unwinding of the discount is recognized in profit or loss as a finance cost when it occurs.

IFRS Accounting Standards also require risks that are specific to the liability to be reflected in the best estimate. This can be done by (1) adjusting the cash flows for risk, or (2) using a risk -adjusted discount rate. In our experience, it is generally easier to incorporate risk factors into the estimate of the cash flows and use a pre - tax risk - free discount rate. Because a risk - adjusted discount rate should reflect the risks specific to the liability, the use of a company’s incremental borrowing rate would not be an appropriate proxy. Therefore, adjusting the discount rate for risk can be challenging due to the complexity and high degree of judgment involved.

Although US GAAP does require discounting for certain obligations (e.g. asset retirement obligations), the general model in Topic 450 does not permit it unless the amount and timing of the cash outflows are fixed or reliably determinable. It is unlikely that a contingency relate to a legal claim would meet these criteria.

Certain legal claims may be subject to reimbursement, in the form of insurance proceeds, indemnities or reimbursement rights, such as in these examples.

Under IFRS Accounting Standards, the related reimbursement is recognized as a separate asset when recovery is virtually certain. The reimbursement asset cannot exceed the related provision amount.
Unlike IFRS Accounting Standards, under US GAAP a recovery of a loss contingency (i.e. up to the amount of the recognized loss), is recognized as a separate asset when recovery is ‘probable’ – i.e. a matching recognition threshold. However, any amount in excess of the loss contingency is a gain contingency that is recognized only when realized or realizable.

Reimbursement assets are not netted against the related provision (loss contingency) on the balance sheet. However, the expense and related reimbursement may be netted in profit or loss under both IFRS Accounting Standards and US GAAP.

IAS 37 requires robust qualitative and quantitative disclosures by class of provisions. Information is also required for certain contingent liabilities, also by class. A limited exemption is provided in the extremely rare case that the disclosures would seriously prejudice a dispute.

The quantitative disclosures include movements in each class of provision (e.g. legal claims) during the reporting period. This rollforward schedule needs to distinguish amounts reversed and unused from amounts used. The amounts disclosed for each class of provision are computed claim - by - claim and cannot be netted against other provision increases or decreases.

Like IFRS Accounting Standards, US GAAP also require robust qualitative and quantitative disclosures for provisions and off - balance - sheet contingencies. A limited disclosure exemption exists for unasserted claims if certain criteria are met. The information is often provided for individual contingencies (subject to materiality), rather than by class of contingencies. However, the SEC staff has acknowledged that some confidentiality concerns could be addressed through the aggregation of similar loss contingencies, given that disaggregation by individual matter is not required.

Unlike IFRS Accounting Standards, US GAAP does not require a rollforward for each class of provision, therefore unused amounts are not disclosed.

Given the uncertainty around both the risk of loss and the timing and amount of potential expenditures, accounting for legal claims requires significant management judgment. Companies need a solid grasp of the recognition and measurement requirements under IFRS Accounting Standards and strong processes to ensure provisions are recognized and updated as circumstances change – especially when determining whether a present obligation exists and how likely it is that the claim will be lost or settled. For dual preparers, differences between IFRS Accounting Standards and US GAAP may lead to different provision amounts. Regardless of the framework applied, clear and comprehensive disclosures remain essential to inform users of the financial statements about the risk of loss.

Footnotes

¹ IAS 37, Provisions, Contingent Liabilities and Contingent Assets. IAS 37 has limited scope exclusions – e.g. rights and obligations under insurance contracts, income tax uncertainties, employee benefits, share - based payments.

² KPMG’s article, Restructuring under IFRS® Accounting Standards, covers specific application issues related to restructuring provisions.

³ Topic 450, Contingencies

⁴Under IFRS Accounting Standards, a disclosure is required if an obligation is not recognised because there is uncertainty about:

its existence – i.e. it is a possible rather than a present obligation; or
the outflow of economic resources – i.e. it is a present obligation but the outflow is not probable or cannot be measured reliably.

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Valerie Boissou

Partner, Audit, DPP - Accounting, KPMG US

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Paulina Kumah

Director, Advisory - Accounting Advisory Services, KPMG US

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Valerie Boissou

Partner, Audit, DPP - Accounting, KPMG US

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Paulina Kumah

Director, Advisory - Accounting Advisory Services, KPMG US

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Relevant Results

When should a provision for a legal claim be recognized?

How is the best estimate determined?

These differences are illustrated in the following example.

What costs to include?

Risk and discounting

Reimbursements

Disclosures and limited exemption

The takeaway

Footnotes

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