Question

​‘A provision and a contingent liability are the same.’ Discuss.

Answer 1

A provision and a contingent liability are not the same.

A provision is an amount set aside from the profits of a company to meet an expected liability at an uncertain time in the future or to decrease the value of an asset. The amount of the liability can be reasonably estimated. A provision is recorded as an expense and a related liability is incurred. Provisions may be recorded for estimated bad debts, inventory obsolescence, depreciation of assets, etc.

A contingent liability is an expected liability that may occur in future if the outcome of an uncertain event is unfavorable to the company. Usually a contingent liability is not recorded unless it is probable and the amount of liability can be resonably estimated.

Thus, the difference between a provision and a contingent liability is that, the occurence of liability in case of a provision is certain but the time of its occurence is not certain. Whereas in case of a contingent liability neither the occurence of the liability is certain nor its time is certain.