In accounting , provisions are liabilities that are uncertain in terms of their existence or amount , but are expected with a sufficiently high degree of probability . In the balance sheet they are among the liability items . Provisions are borrowed capital and must not be confused with reserves that are part of equity .
In general, liabilities are to be recognized at all companies with their settlement amount ( (1) HGB ). The settlement amount is the amount that has to be raised to settle a liability. This applies initially to liabilities for which there are no doubts as to their reason or amount. If there is any doubt about this, the law requires that the liabilities resulting from this must also be recognized as a liability so that the principle of commercial prudence ( German Commercial Code) can be observed.
Provisions are a delimitation of cross-period success processes, because their formation is connected with an immediate expense that reduces the profit or increases the loss and is only realized when the liability is due in later accounting periods. This delimitation principle requires, on the one hand, that the uncertain liability must have arisen before the balance sheet date and, on the other hand, an estimate of the compliance costs that is as accurate as possible must be made.
The normative fact, the legal consequence of which is the liability, must essentially be realized before the balance sheet date. Legal proceedings with a regularly uncertain process must therefore be pending until the balance sheet date . The criteria are existing uncertain obligations to third parties and not the probability of a claim existing on the reference date. The element of uncertainty relates to the amount, existence or creation of a liability; In the case of liabilities subject to suspensive or dissolving conditions, it is not clear whether the condition will occur. However, there is no uncertainty about the person of the obligee, an uncertainty about the due date is irrelevant according to the HGB , but according to IAS 37 it also leads to the disclosure as a provision.
Liability and expense provisions
The provisions can generally be divided into liability and expense provisions. In the case of a school return, there is an uncertain legal obligation towards third parties, while in the case of an expense reserve there is a voluntary obligation , for example in the case of the decided - and not yet completed - implementation of operational maintenance measures. The structure of(3) BI – III HGB divides the provisions into pension, tax and other provisions. This rough breakdown by type of creditor enables a factual delimitation with regard to the origin of future debts.
In the event of a direct pension commitment to its employees that is binding on the company, a provision is made according to (1) HGB. The formation requires the written issue of a pension commitment by the balance sheet date , and pension provisions are to be recognized as liabilities when the insured event occurs. An employer of retirement, disability and survivors' benefits should an employee benefits arising from the employment relationship commitments in writing ( para. 1 of the Pension Law ), so that he can make pension provisions. Recognized pension provisions are regularly the result of a direct commitment , while pension commitments over provident funds , pension funds , pension funds or direct insurance policies do not trigger any pension provisions. Pension provisions mean the assumption of insurance risks that are non-operational risks outside of the insurance industry. For indirect commitments and old commitments, there is a passivation option according to EGHGB . A pension provision is recognized at the actuarially determined present value of the future pension payments or other pension benefits. According to (1) of the German Commercial Code (HGB), the present value is to be used for obligations to pensioners and former employees with vested benefits.
The taxes and duties that have arisen economically up to the end of the financial year but have not yet been determined in their amount must be shown here . In the old version of the HGB, deferred tax liabilities in accordance with Section 274 (1) of the HGB were also reported under provisions. With the BilMoG , however, deferred tax liabilities are to be shown in a special item “Deferred tax liabilities”.
- Provisions for impending losses in accordance with pending transaction is always imminent if income and expenses from the same transaction that has not yet been processed do not offset each other, but rather a liability surplus exists on balance. (1) of the German Commercial Code (HGB): A loss from a
- Goodwill provisions are aimed at eliminating defects in its own deliveries and services before the balance sheet date, which the company cannot or does not want to avoid even without a legal obligation.
- Provisions for warranty obligations : Warranty provisions are intended to record the risk of future expenses due to free rework or replacement deliveries or from reductions or compensation payments due to non-performance due to statutory or contractual guarantees. If the relevant requirements are met, they may be set up as individual provisions for the individual guarantee cases that became known by the day the balance sheet was drawn up or as a general provision. In order to set up flat-rate provisions, it is a prerequisite that, based on past experience, there is a certain probability that warranty claims will be made or that experience in the industry and the individual structure of the company indicate the probability of having to provide warranty services.
- Litigation provisions may only be created for pending litigation in which the company concerned is involved as a plaintiff or defendant.
- Provisions for commission
- Annual financial statements and audit provisions
- Provisions for expenses are neglected maintenance that is made up for within 3 months after the balance sheet date and the removal of overburden that is made up for in the following financial year ( (1) No. 1 HGB).
The “other provisions” contain both liability and expense provisions.
In reasonable commercial judgment are to be formed. In the event of a probable claim against the company by a third party, provisions are to be allocated in the expected amount after reasonable consideration of all circumstances, possibly even without final clarification of legal doubts. The principles of prudence and care must be observed ( (7) and Section 156 (4 ) AktG ). When adding provisions, circumstances must be taken into account that brightened the situation on the reporting date at the time the balance sheet was drawn up ( (1) No. 4 HGB). According to the established case law of the Federal Fiscal Court (BFH), the prerequisite for the formation of a provision for uncertain liabilities is either the existence of an uncertain amount of liability or the sufficient probability of future occurrence of a liability based on the reason - the amount of which may also be uncertain - and its economic nature Causation in the time before the balance sheet date. As a further prerequisite for both provisions, the debtor must seriously reckon with his claim., para. 1, sentence 2 HGB is prescribed that provisions under
A claim is probable if, according to the circumstances that existed objectively on the balance sheet date and were known or recognizable up to the point in time when the balance sheet was drawn up, it can be seriously expected that an obligation will be claimed. The most pessimistic alternative should not be chosen with regard to utilization; There must be more reasons for it than against it. The IAS, on the other hand, require a probability of more than 50% for the formation of a provision (IAS 37.15-22). The probability of a claim is given if the facts giving rise to the claim are discovered by the day the balance sheet is drawn up.
The passivation of provisions for obligations from hard letters of comfort presupposes that there is a serious risk of claims arising from the obligation.
The release of provisions is in accordance with(2) of the German Commercial Code (HGB) is only permitted if the reason for its formation has ceased to exist, i.e. there is no (longer) any liability. If expenses and provisions match, provisions are released with no effect on profit or loss; if the provision amounts are too high, the amount in excess of the expenses must be booked as other operating income ( (2) No. 4 HGB), while if the provisions are too low, additional operating expenses arises ( (2) No. 8 HGB). If the repayment amount is below the provision amount, no devaluation may take place ( (1) No. 4 HGB). If the repayment amount is higher than the book value (currency debt), the repayment amount must be recognized.
Provisions are to be released under tax law insofar as the reasons for which they were formed no longer apply. This also applies if
- after the balance sheet date, but before the balance sheet is drawn up, circumstances become known that existed objectively on the balance sheet date, from which it can be concluded that a claim is no longer to be expected;
- the liability no longer represents an economic burden despite the continued legal obligation.
A provision due to a court-pending obligation to pay damages is only to be dissolved if the obligation has been finally and legally rejected.
School accruals may not be accounted for if there is a ban on passivation. Insured damage risks may not be covered by the creation of provisions at the same time. Provisions are therefore self-insurance for uninsured risks. Since the Accounting Law Modernization Act (BilMoG) came into force in May 2009, there has also been a ban on the posting of provisions for expenses. The only exceptions to this are the above-mentioned maintenance provisions, which are made up within 3 months of the balance sheet date, and the removal of overburden, which are made up in the following financial year. The commercial law provisions are now largely identical to the tax law provisions.
The tax regulations in R 5.7 Paragraphs 2 and 3 EStR apply to school returns ; Provisions for impending losses are generally not permitted tax law ( (4a ) of the Income Tax Act ). Expense reserves are not permitted outside of the 3-month period (R 5.7 Paragraph 11 EStR). Exceptions exist for provisions for expenses within the meaning of Paragraph 1 Clause 2 No. 1 HGB (R 5.7 Paragraph 11 EStR).
Provisions represent one of the typical balance sheet items in which hidden reserves can exist. This is promoted by the principle of careful valuation of HGB, but limited by the principle of balance sheet truth . In terms of tax law, the most pessimistic alternative must not be chosen. As part of a reasonable commercial assessment, the probable amount of a claim is estimated when preparing the balance sheet. In order not to burden future financial years with additional expenses, it is legitimate, within the framework of the cautious valuation, to carry the uncertain liability higher than the probable amount. The hidden reserves created in this way are disclosed to the outside observer when the provisions are released if there is “other operating income from the release of provisions”.
Provisions according to IFRS / IAS
Provisions ( Provisions ) are IAS / IFRS a subcategory of debt ( liabilities ); their treatment is regulated in IAS 37. Provisions may only be formed if the general accounting rules of IFRS are met. Accordingly, liabilities are only to be formed if there is an obligation to third parties and an outflow of resources is likely. Since debts according to IFRS must be external obligations, provisions for expenses are not allowed even according to international accounting, as these are not obligations to third parties. In order to classify whether a provision is to be formed, the two criteria must be met one after the other:
- The occurrence of the event for which the provision has to be made is likely (over 50%; more likely than not ).
- The amount of the provision to be created can be reliably estimated.
A provision is only recognized if both conditions are met. In the other case, the amount of the contingent liability and its probability of occurrence must be commented on in the balance sheet annex. In the HGB, on the other hand, due to the principle of prudence, provisions are already formed if the probability is below 50%.
Provisions according to US GAAP
According to US-GAAP , provisions are only to be formed if the probability is even higher than according to IAS / IFRS (70%). A distinction must be made between accruals and provisions. Accruals are so-called accrued debts, the amount and time of which can be estimated very reliably, for example in the case of outstanding bills or holiday provisions. Commissions, on the other hand, are characterized by a higher degree of uncertainty.
Balance sheet consequences of the formation of provisions
The result of creating a provision is that expenses are brought forward in the appropriate period. An expense is booked without any actual outflow of funds. This means that provisions can be used as an instrument for internal financing . In the year in which the provision is created, the annual surplus in the annual financial statements is reduced (or an annual deficit increases). This means that less profit is available for distribution (e.g. as dividends ) and less profit is subject to taxation, provided that the provision has been recognized for tax purposes. The company's equity is reduced accordingly; the proportion of borrowed capital increases. As a result, a lower creditworthiness for external creditors is visualized in the balance sheet, although the company has behaved in accordance with the law. In the year in which the provision is released, there is a correspondingly higher profit disclosure: If the accounted provision is consistent with the expenses actually incurred, the event (e.g. the impending loss) can occur in the period of the event (which is identical to the period in which the provision was released) are shown with no effect on income. If there is a shortfall (provision <actual costs), the difference exceeds the actual expenditure (income from the release of provisions> actual costs). If there is an overfunding (provision> actual costs), when the provision is reversed, income from other accounting periods is generated in the amount of the difference between the provision and the actual expense. In the event of an over- or underfunding, this has a positive or negative effect on the annual surplus in the year in which the provision is used.
Due to the above-mentioned effect of provisions for the annual surplus in connection with the balance sheet valuation leeway, provisions are considered to be an essential accounting policy instrument. This is one of the reasons why other success parameters such as cash flow are considered by several authors to be more meaningful for the economic success of a period.
- Landfill provision
- Accruals and deferrals
- Special items (finance)
- Hidden reserves
- Underwriting provision
- Avella, Felice-Alfredo; Brinkmann, Ralph: "Provisions according to BilMoG", 1st edition 2011, ISBN 978-3-648-01155-3
- BFH BStBl. 1985, p. 44
- BFH HFR 1996, 558
- BFH BStBl. 1982, p. 748
- Robert Winnefeld: Balance sheet manual. Commercial and tax balance sheets, legal form-specific accounting law, special balance sheet issues, special balance sheets. Beck, Munich 1997, ISBN 3-406-40001-9 , marginal number D 998; Ernst Heymann (founder), Norbert Horn (ed.): Commercial code (without maritime law). Comment. Volume 3: 3rd book: §§ 238–342a. 2nd Edition. de Gruyter, Berlin et al. 1999, ISBN 3-11-016585-6 , p. 148.
- Dr. Röver & Partner (Ed.): IFRS guidelines for medium-sized companies. Basics, introduction and application of international accounting. Schmidt, Berlin 2007, ISBN 978-3-503-09774-6 , p. 225 .
- Thomas Hagemann: Pension provisions. A practice-oriented introduction to the expert methodology for calculating pension provisions. Verlag Versicherungswirtschaft, Karlsruhe 2004, ISBN 3-89952-128-5 , p. 14 .
- The employer bears all biometric and capital investment risks
- in conjunction with .
- BFH BStBl. II 1992, pp. 336, 341
- BGH ZIP 1991, 442
- BFH judgment of June 30, 1983, Federal Tax Gazette. 1984 II, p. 263 and of March 24, 1999, Federal Tax Gazette. 2001 II, p. 612
- BFH judgment of October 19, 1993, Federal Tax Gazette. II 1993, p. 891, further information N.
- BFH judgment of October 19, 2005, Federal Tax Gazette. 2006 II p. 371
- BFH judgment of October 2, 1992, BStBl. 1993 II, p. 153
- BFH judgment of October 25, 2006, Federal Tax Gazette. 2007 II, p. 384
- R 5.7 para. 13 EStR 2012
- H 5.7 para. 13 EStH 2013
- BFH judgment of January 30, 2002, Federal Tax Gazette. II, p. 688
- BFH judgment of November 22, 1988, Federal Tax Gazette. 1989 II, p. 359
- BFH judgment of November 27, 1997, Federal Tax Gazette. 1998 II, p. 375
- R 5.7 EStR