Recognizing provision in accounting

1. Provision
IAS-37
Md. Timur Arafat
Hoda Vasi Chowdhury & Co
Tax Employee benefits
Warranties &
guarantee
Future operating
losses
Pollution to
clean up
Staff retraining for
law changes
Loss seems in
court case
Repairs and
maintenance

2. Definition
Present obligation as a result of a past event, whereby-
Settlement of the obligation - require future outflow of resources
Uncertain amount or timing
Reliable estimate is feasible

3. Recognizing a provision
Start
Present obligation as a
result of an obligating
event
Provision Do nothing
Disclose contingent
liability
Possible obligation ?
Reliable estimate ?
Probable
outflow ?
Remote?
No
No
No (rare)
No
No
Yes
Yes
Yes
Yes Yes

4. Measurement of provisions
Best estimate of expenditure to settle the present obligation at balance sheet date
- Most likely amount
- Probability-weighted expected value
- Discounted PV using a pre-tax discount rate and the risks specific to the liability
Adjust to reflect the current best estimate.
No longer probable? Then reverse.

5. - Obtain details of the basis and ensure adequacy, correctness and consistency
What required to check ?
- Check appropriateness considering the nature of business
- Review the stock sheets (damaged, slow moving or obsolete items correctly written?)
- Review WIP (ensure that provision has been made against any ‘old’ jobs)
Assessing the need for any further provision: (consider following)
- Production levels are falling ?
- Stock levels are high in comparison to orders received and anticipated demand ?
- Any fluctuations in cost or selling price ? and
- Likely change in technology or market demands ?
- Ensure adequate provision for all bad and doubtful trade debts.
- Subsequent position check – (was the estimation reasonable ?)

6. Ensure its completeness by reviewing:
(a) the previous year’s provisions
(b) items recorded on the bank certificate;
(c) minutes of meetings;
(d) major contracts
(e) Correspondence and
(f) Ageing
What required to check ?
- Sampling of stock and WIP items
- compare costs to (selling price - expenditure for realization)
- Losses on one line cannot be set off against profits on another, so check such instances, and
- Provision is made on a finished product?  YES ?  ensure provision against
WIP and materials in the process.
excessive provisions
deliberate
overstatement

7. – Accounting policies for each major type of provision (for example, warranties)
– Movements in provisions during the period
– Confirm in the letter of representation
– Report separately. (Not with trade and other payables)
Disclosures

8. Any Questions ?