Example of Provision Recognition

Example of Provision Recognition

Provision is to be recognized subject to fulfillment of following condition

1.      Present Obligation: The organization has the present obligation. A present obligation arises from the past events. The present obligation may be further classified into legal and constructive obligation.

2.      Resources outflow: The resources outflow is expected to settle the provision in future.

3.      Reliable Estimate of Liability: A reliable estimate can be made of liability.

Example of Provision Recognition # 1

ABC & Co has production process has damages some green fields. It is expected that some people would file a case against company for damages. How much provision is required?

Solution

In above example a reliable estimate of liability cannot be made therefore a provision is not required in this case.

Example of provision Recognition # 2

ABC & Co is expected to launch a new product in next year. Due to the new product it is expected that 20% of sales will be return. The expected sales of next year are 100,000. What amount of provision is required?

Solution

Provision is required to be made against a past event and in this case the event i.e. (sales) is a future event and therefore no provision is required for future events.