Provisions

Provisions recognise obligations that are real but not yet fixed in amount or date. Common examples include expected costs of warranty repairs, legal claims the company is likely to lose, restructuring costs once a plan has been announced, and obligations to restore a site or dismantle equipment at the end of its use.

For example, a manufacturer that sells products with a one-year warranty may expect 2% of products to need repair at an average cost of 100. If it sold 50,000 products, it would record a warranty provision of about 100,000.

Under IFRS, a provision is recognised when there is a present obligation, an outflow of resources is probable and a reliable estimate can be made. US GAAP uses a similar idea but different terms. If the obligation is only possible rather than probable, or cannot be estimated reliably, it is disclosed as a contingent liability instead.

Provisions involve judgment, so they are reviewed at each reporting date. Releasing an unused provision increases profit, which is why auditors check them closely. A loan loss provision in banking is one specific example of the general idea.