Provision (accounting)
Encyclopedia
In financial accounting, provision is a word that creates an ambiguous account title. In U.S. GAAP, provision means an expense, while in IFRS, International Financial Reporting Standards, it means a liability. So, in the U.S., Provision for Income Taxes means the same thing as Income Tax Expense, while under IFRS, Provision for Income Taxes means Liability for Income Taxes Payable. Another examples is provisions for warranty costs [expense in the US and liability in IFRS]. Sometimes in IFRS, but not in US GAAP, the term reserve
is used instead of term provision; such a use, however, is inconsistent with the terminology suggested by International Accounting Standards Board. Reserve, which seems to be one of the most confusing terms in accounting, has the connotation of a debit balance to non-professionals but in accounting always means an account with a credit balance. Reserve for Warranties means estimated liability for future warranty repairs and replacements, NOT a pool of cash set aside for the firm to use in making repairs.
Provision: In IFRS, but not US GAAP, a present obligation which satisfies the rest of the definition of a liability, even if the amount of the obligation has to be estimated.
Provision can also be defined as the "liability of uncertain timing and uncertain amount" (Framework)
Provisions are defined under the AS-29 of Indian Accounting Standards
a business firm may consider it proper to set up some mechanism to protect itself from the consequences of unknown expenses and losses.
Reserve (Accounting)
In financial accounting, the term reserve is most commonly used to describe any part of shareholders' equity, except for basic share capital. Sometimes, the term is used instead of the term provision; such a use, however, is inconsistent with the terminology suggested by International Accounting...
is used instead of term provision; such a use, however, is inconsistent with the terminology suggested by International Accounting Standards Board. Reserve, which seems to be one of the most confusing terms in accounting, has the connotation of a debit balance to non-professionals but in accounting always means an account with a credit balance. Reserve for Warranties means estimated liability for future warranty repairs and replacements, NOT a pool of cash set aside for the firm to use in making repairs.
Provision: In IFRS, but not US GAAP, a present obligation which satisfies the rest of the definition of a liability, even if the amount of the obligation has to be estimated.
Provision can also be defined as the "liability of uncertain timing and uncertain amount" (Framework)
Provisions are defined under the AS-29 of Indian Accounting Standards
See also
- Balance sheetBalance sheetIn financial accounting, a balance sheet or statement of financial position is a summary of the financial balances of a sole proprietorship, a business partnership or a company. Assets, liabilities and ownership equity are listed as of a specific date, such as the end of its financial year. A...
- Income statementIncome statementIncome statement is a company's financial statement that indicates how the revenue Income statement (also referred to as profit and loss statement (P&L), statement of financial performance, earnings statement, operating statement or statement of operations) is a company's financial statement that...
- International Financial Reporting StandardsInternational Financial Reporting StandardsInternational Financial Reporting Standards are principles-based standards, interpretations and the framework adopted by the International Accounting Standards Board ....
- IAS 37: Provisions, Contingent Liabilities and Contingent Assets
a business firm may consider it proper to set up some mechanism to protect itself from the consequences of unknown expenses and losses.