LIABILITY AND PROVISION

[Dagabie]

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What is the diference between a liability and a provision?

[Dagabie]

LIABILITY AND PROVISION


DIFFERENCE:

- provision is a liability of uncertain timing or amount.
there is uncertainty about the timing or amount of the future expenditure required
settlement.
- provision is mostly based on reliable estimates.
- provision for an item of expenditure is subject to review periodically.
- provision is based on past not future events as at the balance sheet date.
- all provisions are first charged to income statement and shown in the balance sheet
as a liability.
- not all provisions involve the payment of cash or transfer of resources in
settlement. e.g. provision for depreciation.

LIABILITY

- liability is a present obligation of an entity arising from past events the settlement of
which is expected to result in an outflow from the entity of resources embodying
economic benefits.
- there is no uncertainty about the amount to be settled. e.g. supply of goods or
services which are yet to be paid for.
- not all liabilities are first charged to income statement as an expense. e.g. purchase
of computer on credit.

Ref. IAS 37 (10 to 11)