BIM46515 | Specific deductions: provisions: accounting standards and GAAP

The guidance in this chapter refers to FRS 102 Section 21 Provisions and Contingencies.

Related standards under other frameworks are:

FRS 105 Section 16 Provisions and Contingencies

IAS: IAS 37 Provisions, Contingent Liabilities and Contingent Assets.

Old UK GAAP: FRS 12 Provisions, Contingent Liabilities and Contingent Assets.

If you have concerns regarding the accounting treatment of a provision, seek advice from an HMRC Advisory Accountant.

The basis of FRS 102 Section 21 is that provisions must satisfy the definition of a liability: ‘a present obligation arising from past events, the settlement of which is expected to result in an outflow of resources embodying economic benefits’. Mere anticipation of future expenditure, however probable and no matter how detailed the estimate, is not enough in the absence of an obligation at the reporting date. FRS 102 Section 21 defines provisions as ‘liabilities of uncertain timing or amount’.

FRS 102 Section 21 sets out the general principles which prescribe when provisions must be made, and when they must not, and also includes guidance on how provisions should be quantified.

FRS 102 Section 21 does not apply to:

• Adjustments to the carrying amounts of assets such as inventory provisions, debt impairment provisions and provisions for depreciation.

• Financial instruments (including loan commitments) within the scope of FRS 102 Section 11 and Section 12 and insurance contracts (including reinsurance contracts) that an entity issues or holds.

• Executory contracts (i.e. contracts under which neither party has performed any of its obligations or both parties have partially performed their obligations to an equal extent) unless they are onerous.

• Provisions which are specifically addressed by other sections of FRS 102 or by other accounting standards.