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The Finance Book by Si Hussain, Stuart Warner

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14 Provisions and contingencies

‘There is nothing more imprudent than excessive prudence.’

Charles Caleb Colton, British clergyman and author

In a nutshell

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.

Need to know

Provisions

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:

  • There is a present obligation ...

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