A provision is a liability of uncertain timing or amount.
To better understand the nature of the financial reporting line ‘Provisions’ a comparison is made with other liabilities and contingent liabilities. From their nature provisions are more or less in between other liabilities (less uncertain) and contingent liabilities (more uncertain).
Provisions and other liabilities
Provisions can be distinguished from other liabilities such as trade payables and accruals because there is uncertainty about the timing or amount of the future expenditure required in settlement. By contrast:
- trade payables are liabilities to pay for goods or services that have been received or supplied and have been invoiced or formally agreed with the supplier; and
- accruals are liabilities to pay for goods or services that have been received or supplied but have not been paid, invoiced or formally agreed with the supplier, including amounts due to employees (for example, amounts relating to accrued vacation pay). Although it is sometimes necessary to estimate the amount or timing of accruals, the uncertainty is generally much less than for provisions.
Accruals are often reported as part of trade and other payables, whereas provisions are reported separately.
Provisions and contingent liabilities
In a general sense, all provisions are contingent because they are uncertain in timing or amount. However, in this case the term ‘contingent’ is used for liabilities that are not recognised because their existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity. In addition, the term ‘contingent liability’ is used for liabilities that do not meet the recognition criteria.
Therefore IAS 37 Provisions, Contigent liabilities and Contingent Assets distinguishes between:
- provisions – which are recognised as liabilities (assuming that a reliable estimate can be made) because they are present obligations and it is probable that an outflow of resources embodying economic benefits will be required to settle the obligations; and
- contingent liabilities – which are not recognised as liabilities because they are either:
- possible obligations, as it has yet to be confirmed whether the entity has a present obligation that could lead to an outflow of resources embodying economic benefits;
- present obligations that do not meet the recognition criteria in this Standard (because either it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation, or a sufficiently reliable estimate of the amount of the obligation cannot be made).