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HMRC internal manual

Business Income Manual

HM Revenue & Customs
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Specific deductions: provisions: accounting standards and GAAP

The guidance in this chapter refers to Section 21 of FRS102. Other accounting standards dealing with provisions are FRS12 and IAS 37 neither of which is substantially different to section 21 of FRS102. If you have concerns regarding the accounting treatment of a provision, seek advice from an HMRC compliance accountant.

The basis of Section 21 of FRS102 is that provisions must satisfy the definition of a liability: ‘a present obligation arising from past events, the settlement of which is expected to result in an outflow of resources embodying economic benefits’. Mere anticipation of future expenditure, however probable and no matter how detailed the estimate, is not enough in the absence of an obligation at the reporting date. Provisions are defined by Section 21 of FRS102 as ‘liabilities of uncertain timing or amount’.

Section 21 of FRS102 sets out the general principles which prescribe when provisions must be made, and when they must not, and also includes guidance on how provisions should be quantified.

Section 21 of FRS102 does not apply to:

  • Adjustments to the carrying amounts of assets such as inventory provisions, debt impairment provisions and provisions for depreciation.
  • Financial instruments (including loan commitments) within the scope of Section 11 and Section 12 of FRS102 and insurance contracts (including reinsurance contracts) that an entity issues or holds.
  • Executory contracts (i.e. contracts under which neither party has performed any of its obligations or both parties have partially performed their obligations to an equal extent) unless they are onerous.
  • Provisions which are specifically addressed by other sections of FRS102 or by other accounting standards.