Definition
Provisions (Accounting)
A provision is a liability of uncertain timing or amount that a company recognises when it has a present obligation likely to require an outflow of resources.
Distinct from a contingent liability, a provision is recognised on the balance sheet because an outflow is probable and can be reliably estimated. Common examples include warranties, restructuring costs, employee benefits and legal claims, governed by Ind AS 37.
For lenders, loan-loss provisions are a specific type. Provisions reduce reported profit when created and are reversed if the obligation does not materialise. Because they involve management judgement, provisioning is an area analysts watch for earnings management.
Related terms
- Credit CostCredit cost is the provisioning a bank or NBFC books for bad and doubtful loans during a period, usually expressed as a percentage of average advances.
- Contingent LiabilityA contingent liability is a possible obligation that may arise depending on a future event, disclosed in the notes rather than recognised on the balance sheet.
- Notes to AccountsNotes to accounts are the detailed disclosures accompanying financial statements that explain accounting policies, breakdowns and items not visible on the face of the statements.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.