What is Provisions in Accounting?
A provision is a liability of uncertain timing or amount that is recognised when an entity has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources will be required to settle the obligation, and a reliable estimate can be made of the amount. IAS 37 governs the recognition and measurement.
How It Works
- Confirm the three IAS 37 recognition criteria: present obligation, probable outflow, reliable estimate.
- Measure the provision at the best estimate of the expenditure required to settle the obligation.
- Discount the provision if the time value of money is material.
- Review the provision at each reporting date and adjust to reflect the current best estimate.
Saudi Context
Saudi companies recognise provisions for warranty claims, restructuring, environmental remediation, and end-of-service benefits. ZATCA generally allows recognised provisions when they meet IAS 37 criteria for zakat purposes, but reverses unutilised provisions that drag on for multiple years without realised outflow.
Example
A Saudi electronics retailer estimates that 5% of warranty claims on SAR 10 million in sales will materialise at an average cost of SAR 200 each, for 1,000 units. It recognises a SAR 200,000 warranty provision at year-end.