‘There is nothing more imprudent than excessive prudence.’
Charles Caleb Colton, British clergyman and author
Provisions and contingencies are liabilities arising from past activities, which a company may have to pay in the future.
To present a realistic and prudent picture of financial performance, company accounts may include provisions for liabilities, even where the extent and timing of these liabilities cannot be precisely determined.
A provision is a known yet imprecise liability, i.e. we know it exists but we may not know exactly when it will have to be paid or how much.
A provision has to be made when each of the following occurs: