Accounting

What Are The Characteristics Of A Provision

Characteristics of a provision?

The characteristics of a provision are that it is a liability where there is uncertainty as to either the timing of settlement or the amount to be settled. When measuring a provision, the amount to be recognized should be the best estimate of the consideration required to settle the present obligation at the end of the reporting period. The fact that it is difficult to measure a provision and that estimates have to be used does not mean that the provision is not reliably measurable.

The recognition criteria for provisions are contained in IAS 37 (paragraph 14). A provision should be recognized when:

  • an entity has present obligation(s) as a result of a past event(s);
  • if it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation;
  • a reliable estimate can be made of the amount of the obligation
  • a specific current statement, the entity will accept certain responsibilities and other parties have valid expectations that the entity will discharge its responsibilities.

No provision will be recognized for costs that need to be incurred to operate in the future. Also, an obligation always involves another party to whom the obligation is owed even if this party is not known. A provision is an amount that is put aside to cover a future liability. The purpose of a provision is to make the balance of current year more accurate, as there may be costs which could be accounted for in either the current or previous financial year. The recording of the provision or liability in the balance sheet of the company is matched to an appropriate expense account in the company income statement. Do not get confused with the Provision and Reserve. I will explain the term “Reserve” in upcoming post.

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