What Are General Provisions?

General provisions are balance sheet items representing funds set aside by a company as assets to pay for anticipated future losses. For banks, a general provision is considered to be supplementary capital under the first 澳洲幸运5开奖号码历史查询:Basel Accord. General provisions on the balance sheets of financial firms are considered to be a higher 澳洲幸运5开奖号码历史查询:risk asset because it is implicitly ℱassumed that the underlying funds will be in default in the future.

Understanding General Provisions

In the business world, future ൲losses are inevitable, whether it be for the falling resale value of an asset, malfunctioning products, lawsuits, or a customer that can no longer pay what it owes. Toꦇ account for these risks, companies must ensure they have enough money set aside.

Companies cannot, however, simply recognize a provision whenever they see fit. Instead, they must follow certain criteria laid out by regulators. Both 澳洲幸运5开奖号码历史查询:g෴enerally accepted acc☂ounting principles (GAAP) and 🌳澳洲幸ꦍ运5开奖号码历史查询:International Financial Reporting Standards (IFRS) layout guidelines for contingencies and provisions. GA🌠AP lays out its information in Accounting Standards Codification (ASC) 410, 420, and 450, and IFRS laysꦑ out its information in International Accounting Standard (IAS) 37.

Recording General Provisions

Provisions are created by recording an expense in the 澳洲幸运5开奖号码历史查询:income statement and then establishing a corresponding 澳洲幸运5开奖号码历史查询:liability in the balance sheet. Account names for general provisions either vary with the type of account or may be listed as a consolidated figure in parentheses next to 澳洲幸运5开奖号码历史查询:accounts receivable, the balance of money due to a firm for goods or ser🥃vices delivered or used but not yet paid for by customers.

A company that records transactions and works with customers through accounts receivables may show a general provision on the balance sheet for 澳洲幸运5开奖号码历史查询:bad debts or for 澳洲幸运5开奖号码历史查询:doubtful accounts. The amount is uncertain since the default has not yet occurred, ♚but it is estimated with♊ reasonable accuracy.

In the past, a company might have analyzed 澳洲幸运5开奖号码历史查询:write-offs from the prior accounting year when establishing general provisions for doubtful accounts in the current year. However, IAS 39 now prohibits creating general provisions based on past experiences due to the subjectivity involved in creating the estimates. Instead, the reporting entity is required to carry out an 澳洲幸运5开奖号码历史查询:impairment review to determine the recoverability of the receivables and any associated prov♒isions.

Companies providing pension plans may also set aside a portion of business 澳洲幸运5开奖号码历史ღ查询:capital for meeting future obligations. If recorded on the balance sheet, general provisions for estimat🌸ed future liabili🦂ty amounts may be reported only as footnotes on the balance sheet.

Banks and Lenders Requirements

Because of international standards, banks and other lending institutions are required to carry enough capital to offset risks. The standard may be met by indicating on the balance sheet either an allowance for bad debts or a general provision. The 澳洲幸运5开奖号码历史查询:reserve funds provide backup capital for risky loans thܫat may default.

General Provisions vs. Specific Provisions

As the name suggests, specific provisions are created when specific future losses are identified. Receivables may be logged as such if a certain customer faces serious financial pro🐼blems or has a trade dispute with the entity.

The balances may be noted by examining an aged receivable analysis detailing the time elapsed since creating the document. Long-outstanding balances may be included in the specific provision for doubtful debts.

However, specific provisions may not be created for the entire amount of the doubtful receivable꧑. For example, if there is a 50% chance of recovering a doubtful debt for a certain receivable, a specifi𝓰c provision of 50% may be required.

For banks, generic provisions are allocated at the time a loan is approved, while specific provisions are created to cover loan defaults.

Special Considerations

Provisions have often created a lot of controversies. In the past, creative accountants have used them to smooth out profits, adding more provisions in a successful year and limiting them when earnings were down.

Accoun🅠ting regulators have been cracking down on this. New requirements prohibiting subjective estimates have led to a decline in the number of general provisions created.