A liability of uncertain timing or amount recognized in the financial statements when a present obligation exists and a reliable estimate can be made.
A Provision (under Ind AS 37 / IAS 37) is recorded when three conditions are met: (1) a present obligation exists from a past event, (2) it's probable that an outflow of economic benefits will be required, and (3) a reliable estimate of the amount can be made. Common provisions include: warranty claims, employee benefits (gratuity, leave encashment), restructuring costs, environmental remediation, legal disputes, and tax uncertainties. Provisions differ from accruals (where timing and amount are more certain) and contingent liabilities (where the obligation is possible but not probable). The provision amount should be the best estimate of expenditure required to settle the obligation, discounted to present value if the time value of money is material. Provisions must be reviewed and adjusted at each balance sheet date.
A company sells electronics with 2-year warranty. Historical data shows 3% of products require warranty repair at an average cost of ₹2,000. Annual sales: 10,000 units. Warranty provision: 10,000 × 3% × ₹2,000 = ₹6,00,000. Journal entry: Debit Warranty Expense ₹6,00,000, Credit Provision for Warranty ₹6,00,000.
glossaryTermPage.reasons.accuracy
glossaryTermPage.reasons.compliance
glossaryTermPage.reasons.decisions
glossaryTermPage.reasons.efficiency
A provision is charged against profit to cover a known liability of uncertain amount/timing (it reduces profit). A reserve is an appropriation of profit set aside for future use (retained earnings, general reserve) — it doesn't reduce profit, it allocates it. Provisions appear in liabilities; reserves appear in equity.
No. Ind AS 37 explicitly prohibits creating provisions for future operating expenses, future losses, or general business risks. Provisions can only be made for present obligations from past events. Creating provisions to smooth profits (cookie jar reserves) is a form of earnings management and violates accounting standards.
A potential financial obligation that may arise depending on the outcome of a future uncertain event, such as a pending lawsuit or warranty claim.
Expenses that have been incurred but not yet paid or recorded in the accounting books at the end of an accounting period.
An estimated allowance set aside in the books to account for receivables that are unlikely to be collected, also called allowance for doubtful accounts.
Formal records of a business's financial activities, comprising the Balance Sheet, Profit & Loss Statement, Cash Flow Statement, and Notes to Accounts.
glossaryTermPage.cta.subtitle