provision definition
obligations (liabilities) to a third party that, at the end of the period, are of uncertain timing or amount
only book provisions when
- present obligation
- outflow of resources is probable
- amount is reliably estimatable
general provision entry
D: Expenses (6XX)
(“Exceptional losses” (678) -> expense unclear)
C: 14X Provision (eg. taxes, other responsibilities)
entry at settlement of provision when provisioned is less than real amount (lacking)
D: expense (for lacking part)
C: provision
entry for provision at settlement when provisioned is more than actual amount (excessive)
D: Provision
C: (795) provision surplus
50/50% chance of getting sued
no provision, just note in financial statements (“footnote disclosure”)
Provisions surplus responds to
The revenue we will record when the amount finally paid is smaller than our initial estimation
In December 2024, a company estimates that it will have to pay €120,000 in environmental restoration costs due to its operations during 2024. The payment will likely occur in 2026.
How should the company account for this?
a. The company should disclose the expected cost in the financial statements but not recognize any liability.
b. The company should allocate €60,000 per year as an expense in 2025 and 2026.
c. I do not know the answer.
d. The company should record a provision of €120,000 in 2024, debiting “678 Exceptional Losses” and crediting “145 Provision for Environmental Issues.”
e. The company should wait until 2026 and record the full amount as an expense when the payment is made.
The correct answer is d.
Here’s why in the clearest way:
✅ Why option d is correct
Under Spanish GAAP (PGC), you must recognize a provision when:
- There is a present obligation (legal or constructive).
- An outflow of resources is probable.
- The amount can be reliably estimated.
