Provision

A Provision is a legal or financial arrangement that sets aside resources or creates terms to handle future events, contingencies, or obligations.

• Context:
  • It can (often) be a liability included within a contract or other legal agreement.
  • ...
  • It can establish Future Obligations or Rights that may arise under specific circumstances.
  • It can serve as a Risk Management Tool by anticipating and preparing for potential future events.
  • It can function as an Accounting Entry recognizing probable future expenses or liabilities.
  • It can create Procedural Requirements for handling specific situations or events.
  • It can allocate Financial Resources for anticipated future needs.
  • It can define Compliance Requirements and consequences of non-compliance.
  • ...
  • It can have purposes, such as:
    • Anticipates future events or obligations
    • Manages potential risks
    • Allocates resources or responsibilities
    • Establishes procedures or requirements
  • It can have characteristics, such as:
    • Specificity: Clear definition of terms, conditions, or amounts
    • Temporality: Future-oriented nature
    • Enforceability: Legal or contractual binding effect
    • Measurability: Quantifiable impact or requirements
  • It can have types, such as:
    • Legal Provisions: Contractual terms, statutory requirements, regulatory obligations
    • Financial Provisions: Accounting reserves, fund allocations, financial commitments
    • Operational Provisions: Procedural requirements, operational standards
    • Contingency Provisions: Emergency procedures, backup arrangements.
  • ...
• Example(s):
  • a Contract Provision: "In the event of default, the lender may accelerate all outstanding payments"
  • a Financial Provision: "The company shall maintain a warranty reserve equal to 2% of annual sales"
  • a Reserve Fund: "A maintenance reserve fund of $100,000 shall be established"
  • a Contingency Clause: "If force majeure events occur, parties may suspend performance"
  • a Bad Debt Provision: "5% of accounts receivable shall be reserved for potential bad debts"
  • a Warranty Provision: "Estimated future warranty claims shall be accrued monthly"
  • ...
• Counter-Example(s):
  • Revenue Stream: Ongoing income rather than reserved resources
  • Capital Expense: Current expenditure rather than future provision
  • Income: Earned resources rather than set-aside funds
  • Current Asset: Immediately available resource rather than future provision
  • Actual Transaction: Completed exchange rather than future arrangement
  • ...
• Relationships
  • Parent Concepts:
    • Legal Arrangement
    • Financial Planning
    • Risk Management
  • Related Concepts:
    • Contractual Term
    • Accounting Reserve
    • Contingency Planning
  • Subordinate Concepts:
    • Specific Provision Types
    • Implementation Methods
    • Monitoring Requirements
• See: Obligation, Contractual Term, Contract Clause, Liability Management, Financial Planning, Risk Mitigation, Resource Allocation, Future Planning.

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References

2023

• (GM-RKB ChatGPT, 2023) ⇒ Summarize the concept Provision in 1- 2 paragraphs, promt.GM-RKB ChatGPT (model: gpt-4-1106-preview) Retrieved: 2023-12-24.
  • QUOTE: In accounting and finance, a provision is an amount set aside in the accounts of an organization to cover a future liability or decrease in the value of an asset. This is essentially a financial recognition of a probable expense that the organization expects to incur as a result of past events. The creation of a provision is a precautionary measure which ensures that the financial statements provide a true and fair view of the entity's financial position. Provisions are estimated amounts and may not represent the exact actual expense to be incurred, but they must be based on reasonable judgment and information available.

    For example, a company might create a provision for bad debts if they expect that some customers may fail to pay their invoices in the future. Similarly, provisions can be made for warranties, legal disputes, decommissioning costs (especially in industries like oil and gas), restructuring costs, or pension obligations. Accountants will charge these provisions as an expense on the income statement, which reduces the company's net income, and establish a corresponding liability on the balance sheet. Creating provisions aligns with the prudence concept, where businesses recognize expenses and liabilities as soon as possible, even when the exact value or timing may be uncertain.

2016a

• (Wikipedia, 2016) ⇒ http://en.wikipedia.org/wiki/Provision_(accounting)
  • In financial accounting, a provision is an account which records a present liability of an entity. The recording of the liability in the entity's balance sheet is matched to an appropriate expense account in the entity's income statement.

    Sometimes in IFRS, but not in GAAP, the term reserve is used instead of provision. Such a use is, however, inconsistent with the terminology suggested by International Accounting Standards Board. The term "reserve" can be a confusing accounting term. In accounting, a reserve is always an account with a credit balance in the entity's Equity on the Balance Sheet, while to non-professionals it has the connotation of a pool of cash set aside to meet a future liability (a debit balance).

2016b

• (Investopedia, 2016) ⇒ http://www.investopedia.com/terms/p/provision.asp
  • QUOTE: A provision is a legal clause or condition contained within a contract that requires one or both parties to perform a particular requirement by some specified time or prevents one or both parties from performing a particular requirement by some specified time. For example, the anti-greenmail provision contained within some companies' charters protects shareholders from the board wanting to pass stock buybacks.

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