Accountancy/Provisions

Provisions are a form of liability. An example of a provision is provision for honoring warranties on defective products sold.

They can encompass mainly liability that requires settlement within 12 months, therefore they may be regarded as current liabilities. They are not the same as normal liability because there is uncertainty about when they fall due, and the exact amount required for settlement when they fall due, and to whom it is due, but some reasonable estimates can be made from past events as to how much will be due , and that settlement will be probably required for the amount. Hence provisions meet the recognition criteria of probable and measurable for liabilities.

Future costs can not be provisioned, because a liability by definition requires an outflow of economic benefit or is a current economic burden owed to other entities, and not to the self entity. A future cost is an expense , not a liability, and is expended when it occurs, and not settled.

Contingent liabilities are like poorly known provisions, where the amount of liability may be inexact, the probability of occurrence is not highly probable, and although cannot appear in the financial statements ( e.g. as a liability in the balance sheet ) , would make the company look pretty bad if not reported in some way when they are known to have a significant possibility (5-50%) of occurring, so they must be disclosed in the notes to financial statements to discharge the duty to materiality and prudence. An example is a future possible legal settlement cost. Similar to provisions, contingent liabilities are liabilities that cannot be corrected by present decisions to rectify the future obligation, even though the obligations have not certainly occurred.