In
financial accounting
Financial accounting is the field of accounting concerned with the summary, analysis and reporting of financial transactions related to a business. This involves the preparation of financial statements available for public use. Stockholders, ...
under
International Financial Reporting Standards (IFRS), a provision is an account that records a present
liability of an entity. The recording of the liability in the entity's
balance sheet
In financial accounting, a balance sheet (also known as statement of financial position or statement of financial condition) is a summary of the financial balances of an individual or organization, whether it be a sole proprietorship, a business ...
is matched to an appropriate expense account on the entity's
income statement
An income statement or profit and loss accountProfessional English in Use - Finance, Cambridge University Press, p. 10 (also referred to as a ''profit and loss statement'' (P&L), ''statement of profit or loss'', ''revenue statement'', ''stateme ...
. In
U.S. Generally Accepted Accounting Principles (U.S. GAAP), a provision is an expense. Thus, "Provision for Income Taxes" is an expense in U.S. GAAP but a liability in IFRS.
Under International Financial Reporting Standards
In the
International Financial Reporting Standards (IFRS), the treatment of provisions (as well as contingent assets and liabilities) is found in
IAS 37 IAS may refer to:
Science
* Institute for Advanced Study, in Princeton, New Jersey, United States
* Image Analysis & Stereology, the official journal of the International Society for Stereology & Image Analysis.
* Iowa Archeological Society, Un ...
.
Definition
A provision can be a liability of uncertain timing or amount. A liability, in turn, is a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits.
Though it is often thought to be a form of savings, a provision should not be considered as such.
Examples of common provisions are: income tax liability, product warranty, environment restoration, etc.
Lexicology
Sometimes in IFRS, but not in GAAP, the term
reserve
Reserve or reserves may refer to:
Places
* Reserve, Kansas, a US city
* Reserve, Louisiana, a census-designated place in St. John the Baptist Parish
* Reserve, Montana, a census-designated place in Sheridan County
* Reserve, New Mexico, a US ...
is used instead of provision. Such a use is, however, inconsistent with the terminology suggested by the
International Accounting Standards Board
The International Accounting Standards Board (IASB) is the independent accounting standard-setting body of the IFRS Foundation.
The IASB was founded on April 1, 2001, as the successor to the International Accounting Standards Committee (IASC). It ...
. The term "reserve" can be a confusing accounting term. In accounting, a reserve is always an account with a credit balance in the entity's
equity
Equity may refer to:
Finance, accounting and ownership
*Equity (finance), ownership of assets that have liabilities attached to them
** Stock, equity based on original contributions of cash or other value to a business
** Home equity, the diff ...
on the balance sheet, while to some non-accountants (e.g., actuaries), it has the connotation of money set aside to meet a future liability (a debit balance).
Recognition
A provision shall be recognized if the following criteria are fulfilled:
* an entity has a present obligation as a result of a past event;
* 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, however, is 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 unknown).
Executory and onerous contracts
An executory contract is defined as a contract under which neither party has performed any of its obligations (e.g. delivering an object and paying for that object) or both parties have partially performed their obligations to an equal extent. In case of an executory contract, IAS 37 does not apply and neither an asset nor a liability is recorded. However, a provision needs to be recognized if the executory contract becomes onerous to the entity. An onerous contract is defined as a contract in which the unavoidable costs resulting from the entity meeting its contractual obligations exceed the economic benefits expected to be received under that contract.
Restructuring
A restructuring is defined as programme that is planned and controlled by management, and materially changes either the scope of a business undertaken by an entity, or the manner in which that business is conducted. If a restructuring is anticipated, it leads to the recognition of a provision. However, that provision is subject to some specific restrictions: A restructuring provision does not include costs such as the retraining or relocating of continuing staff, marketing, or investment in new systems and distribution networks. This is because these expenditures relate to the future conduct of the business and are thus not liabilities for restructuring to be recognized at the end of the reporting period.
[International Accounting Standard (IAS) 37.80-81]
the objectives of provision are to be for all expenses and losses even when the amount of such
Provision for income tax (United States GAAP)
In American English, the word provision is used as a synonym for "expense", especially when it appears in a phrase that refers to the income tax cost incurred by a business during an income statement period. In income statements, the appearance of provision for income tax would refer to that expense.
See also
*
Balance sheet
In financial accounting, a balance sheet (also known as statement of financial position or statement of financial condition) is a summary of the financial balances of an individual or organization, whether it be a sole proprietorship, a business ...
*
Income statement
An income statement or profit and loss accountProfessional English in Use - Finance, Cambridge University Press, p. 10 (also referred to as a ''profit and loss statement'' (P&L), ''statement of profit or loss'', ''revenue statement'', ''stateme ...
*
International Financial Reporting Standards
International Financial Reporting Standards, commonly called IFRS, are accounting standards issued by the IFRS Foundation and the International Accounting Standards Board (IASB). They constitute a standardised way of describing the company's f ...
*
IAS 37 IAS may refer to:
Science
* Institute for Advanced Study, in Princeton, New Jersey, United States
* Image Analysis & Stereology, the official journal of the International Society for Stereology & Image Analysis.
* Iowa Archeological Society, Un ...
References
External links
IAS B: IAS 37 - Provisions, Contingent Liabilities and Contingent Assets
{{Authority control
Liability (financial accounting)