Provisions

• liability without certain timing or amount
• obligation
  • legal … self explanatory
  • constructive → common with car manufacturers (warranty), web stores with routine return policies
• probably going to happen (high probability)
• must be related to a past event
• reliable estimate → otherwise Contingent Liability
• current provisions → expected next year
  • otherwise non-current provisions (more than 1 year)
• always to a third party (employees, customers, other companies)
• due to judgement of management
  • can be used to “massage” the results
• can be discounted → Discounting
• example: court case you will probably loose

Financing Strategy

• Increasing Provision
• lower Profit
• lower Taxes
• more Cash stays on Cash Accounts

Account Movements

• provision registered with 100
  • PL decreases by 100 !!!!
  • BS + 100 liabilities
    • liability why?
      • this money can never leave the company
      • no mention in which asset class
  • operating CF is not affected !!!
• provision resolved with 110 (more than expected)
  • BS - 100 liabilities | - 110 cash
  • PL - 10
  • operating CF - 110
    • • 10 already included from PL !!!
    • • 100 always booked directly
• provision resolved with 80 (less than expected)
  • BS - 100 liabilities | - 80 cash
  • PL + 20
  • operating CF - 80
    • • 20 already included from PL !!!
    • • 100 always booked directly

Pension Provisions

• employees are entitled to pensions after retirement
• provision why?
  • we don’t know when they die → how much we have to pay
  • and it is just an obligation
• past event: signing of contract and employee working currently
• extra detail: would be in financing cash flow

Sales Provisions

• expected returns or warranty
• if there was a shampoo which causes rashes → reimbursement of damages
• past event: sale of goods

Personell Provisions

• not-consumed holiday taken into next years
• past event: extra profit from employees working more than they should

Restructuring Provisions

• after restructuring fired employees are entitled to some salaries after they have been fired
• costs endured during the restructuring which are then (hopefully) picked up by increased future profits later on
• past event: firing people

Sundry Provision

• sundry … various, not important, too small categories to be listed individually here
• can be against impairment of a brand (if listed in balance sheet) due to publicity damage
• past event: various