Provisions are recorded as a reserve by the enterprise in order to hedge against risks incurred in its operating and financial activities.
One can distinguish between the following types of provisions:
- Provision for depreciation;
- Provisions for expenses to be allocated to more than one financial year: these are foreseeable expenses which cannot be fully borne during the financial year in which they are committed. E.g. provision to cover expenses for major repairs; the following conditions apply:
- purpose must be to cover major expenses which are not annual,
- may be regarded as current expenses for maintenance and repairs,
- must be scheduled, as soon as the asset is acquired by the company, according to the useful life of this asset in the light of the major repairs planned;
- Provisions for pensions: these are expenses which may be incurred as a result of legal or contractual obligations involving staff pension rights;
- Provisions for risks and expenses: these are evaluated at the balance sheet date and intended to cover risks and expenses that are likely to be incurred as a result of past or current events. Their purpose must be clearly stated, but it is not certain when they will need to be used.
The main financial effect of provisions is to reduce the profit of an enterprise for the financial year.
Note: The term "Provisions" is also used in the context of the provision of services which is a synonym for the supply of services.