Before IAS37 provisions were recognized on the basis of prudence, little guidance was given on when a provision should be recognized and how it should be measured. This gave rise to inconsistencies, and also allowed profits to be manipulated.

Some problems are noted below:

(a) Provisions could be recognized on the basis of management intentions, rather than on any obligation to be entity;

(b) Several items could be combined into one large provision. There were known as ‘big bath’ provisions;

(c) A provision could be created for one purpose and then used for another;

(d) Poor disclosure made it difficult to assess the effect of provisions on reported profits. In particular, provisions could be created when profits were high and released when profits were low in order to smooth profits.