Provisions are the most important concept for the one studying accounting. Without the understanding of the concept of provisions it is not possible to understand the true nature and purpose of the subject of accounting. Accounting is a language used to record, summarize and report the financial information of the business to the user of that information…
From this definition, it can be viewed from two aspects. The first aspect of the definition of provisions describe that the provisions are actually the liability. Provisions are directly referred to as the liabilities of the business but not the usual and general liabilities which are recognized in the balance sheet of the business. Provisions are the special type of liability of the business that is described as another head in the capital and liabilities portion of the balance sheet.
The other main feature described by the definition of the provisions is that it is a liability of uncertain amount and uncertain timing. It means that the provisions are not certain in terms of their amount and timing but their nature is known to the accountant. It is known that a certain expense of certain type is going to take place in the future but the exact amount and exact time of the expense is not known to the accountant of the business. Therefore, provisions are the best estimates of the expenses that are going to take place in the future.
Liability is defined in the International Accounting Standards as the present obligation as a result of past events and the settlement of which is expected to result in an outflow of resources. This definition of liabilities also describes the nature and the expected outcome of the liability on the overall business. Hence, a liability is a present obligation which has arisen due to the result of past events and in order to settle that obligation it is probable that the outflow of resources will happen in the near future. Hence the provision is the preparation of the liability whose amount and timing is uncertain but there is surety that the liability will arise at some point in time sooner or later in the future. The concept of provisions provide the accountants with a cushion time to get themselves prepared for the issues that are to rise in the future and therefore, save money for the settlement of future liabilities in the present time. The main point in the provisions is that it is the best estimate of the future amount in present time.
IAS 37 recognizes the problem of provisions in accounting and provides a rule to recognize the provision s in the balance sheet. IAS 37 says that the provisions should be recognized by an entity if and only if:
a present obligation (legal or constructive) has arisen as a result of a past event (the obligating event),
payment is probable ('more likely than not'), and
The amount can be estimated reliably.
These are the rules which tell the entity when to recognize a provision in the balance sheet. Firstly an obligation has arisen as a result of past events and it is also probable that the payment is to be made for that obligation and the amount of the payment can be reliably measured. These rules are used in many countries of the world to recognize the provisions in the balance sheets of the businesses and are successful in addressing the problem of provision recognition in the balance sheet.
Provisions provide the detailed information about liabilities facing the entity. Liabilities like trade creditors etc. provide the information about the liabilities of the business to be paid by the business and the amount and timing of which are certain at present. However, the presence of provisions in the entity's balance sheet prepares those responsible for decision making, to arrange and save the ...
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