The correct answer is: A. Any known liability the amount of which can be ascertained with substantial accuracy.
A provision is a liability that is not recognized in the balance sheet because its amount or timing is uncertain. Provisions are created to recognize a liability that is not yet due, but is expected to be incurred in the future.
Under the Companies Act 1956, a provision is defined as “a liability of uncertain amount or timing.” This means that a provision can be created for any known liability that cannot be accurately estimated. However, a provision cannot be created for an unknown liability.
For example, a company may create a provision for a pending lawsuit. The amount of the lawsuit is uncertain, but the company knows that it is likely to lose the lawsuit and will have to pay damages. The company would create a provision for the estimated amount of the damages.
A company may also create a provision for a future warranty claim. The amount of the warranty claim is uncertain, but the company knows that it is likely to receive warranty claims in the future. The company would create a provision for the estimated amount of the warranty claims.
Provisions are reported in the notes to the financial statements. The notes must disclose the nature of the provision, the
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