Plain definition
A provision is a liability of uncertain timing or amount recognised when a present obligation from a past event exists, an outflow is probable under the applicable requirements, and a reliable estimate can be made. It is not a general reserve for future operating losses, desired investments, or risks the company has not yet created an obligation for. The uncertainty requires evidence and judgment.
Illustrative example
Monetary examples use Saudi riyals (SAR). The same principles apply in other currencies.
A company’s equipment causes damage under a contract, and legal advice supports an obligation to repair customer property. Based on approved estimates, management expects repair cost of and records a provision. If later invoices total , finance uses the evidence to settle or update the obligation; it does not leave the original amount untouched because it was convenient at close.
The recognition threshold, measurement, discounting, reimbursements, and disclosures depend on the applicable requirements. A possible future claim may be a contingent liability rather than a provision.
Why it matters
A missing provision can overstate profit and hide a cash commitment. An unjustified provision can depress current profit and become a reserve that management releases later to smooth results.
Practical consequence
Maintain a claims and obligations register with triggering event, legal or contractual basis, probability assessment, estimate method, evidence, owner, reviewer, expected timing, and disclosure conclusion. Reassess material provisions at every close with legal and operational input, and distinguish a confirmed present obligation from a risk that has not yet become one.