Liabilities Q11

Q11: Explain what a ‘provision’ (for example, a Provision for long service leave) means to you. In particular, if our firm has a ‘provision’ in its balance sheet, does this mean our firm has set aside (or ‘provided’) cash to meet this obligation of our firm when it needs to be paid for in the future? Why or why not?

A:

Ryman Healthcare has an Employee Entitlements provision of $16m in its 2017 Balance sheet, but has no cash at all. So, provisions do not mean a firm has set aside cash (or other resources) to meet its present obligation to fund an outflow of resources embodying economic benefits in the future.

Rather, provisions are a liability called ‘provisions’ because they are ‘provisional’. They are liabilities where the amount or timing of the expected future outflow of economic benefits is uncertain (and thus needs to be estimated). And the accounting standards make it clear that it is only in very rare situations that the amount or timing of the expected future outflow of economic benefits is so uncertain that a liability cannot be included or recognised in our firm’s accounts (and be disclosed as a contingent liability in the footnotes). So the amount or timing of the expected future outflow of economic benefits can be highly uncertain and we will still recognise a provision (or ‘provisional liability’) in our firm’s accounts.

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