Formation and dissolution of provisions

Provisions represent the value of future cash outflows for which the accounting company receives no equivalent value.

Provisions

A provision involves an obligation to perform a service that typically rests on legal obligations or an incident in the past. Unlike "normal" liabilities, one or more of the relevant criteria for a liability is not met. This means that the amount, due date, or actual obligation are not yet determined or are not precisely quantifiable. However, a cash outflow is likely, and its amount can be approximately estimated.

There are various reasons for forming provisions. For instance, provisions may be made in connection with obligations for retirement provisions, tax obligations, legal risks, or potential warranty claims.

The maturity of provisions also needs to be assessed. Short-term provisions are due within 12 months; anything beyond that is referred to as a long-term provision. The provisions must be indicated in the balance sheet.

They are dissolved when they are no longer needed. This applies, for example, to a legal provision that does not have to be fully used for the process. Similarly, when a warranty claim does not materialize and therefore no benefits have to be provided.