Provision (accounting)

Provision (accounting)

In financial accounting, a provision is an account which records a present liability of an entity to another entity. The recording of the liability affects both the current liability side of an entity's balance sheet as well as an appropriate expense account in the entity's income statement.

Under the International Financial Reporting Standards (IFRS) a provision is a liability, while under United States Generally Accepted Accounting Principles (GAAP) it is an expense. Thus, in the United States, a liability for income tax is described as Income Tax Expense, while under IFRS it is described as Income Tax Payable. Similarly, warranty costs are treated as an expense under GAAP and a liability under IFRS.

Sometimes in IFRS, but not in GAAP, the term reserve is used instead of provision. Such a use is, however, inconsistent with the terminology suggested by International Accounting Standards Board. 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 on the Balance Sheet, while to non-professionals it has the connotation of a pool of cash set aside to meet a future liability (a debit balance).

Provisions are also defined in AS-29 of the Indian Accounting Standards.

Provision under IFRS

In the IFRS, the treatment of provisions (as well as contingent assets and liabilities) is found in IAS 37.


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.[1]


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.[2]
  • 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).[3]

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.[4]


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.[5] 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.[6] the objectives of provision are to be for all expenses and losses even when the amount of such

See also


  1. ^ International Accounting Standard (IAS) 37.10
  2. ^ International Accounting Standard (IAS) 37.14
  3. ^ International Accounting Standard (IAS) 37.15-16
  4. ^ International Accounting Standard (IAS) 37.10
  5. ^ International Accounting Standard (IAS) 37.10
  6. ^ International Accounting Standard (IAS) 37.80-81

External links

  • IAS B: IAS 37 - Provisions, Contingent Liabilities and Contingent Assets