Provisions under IFRS and GAAP

[amrdowidar]

Under the International Financial Reporting Standards (IFRS) a provision is a liability, while under United States Generally Accepted Accounting Principles (GAAP) it is an expense. Thus, in the United States, a liability for income tax is described as Income Tax Expense, while under IFRS it is described as Income Tax Payable. Similarly, warranty costs are treated as an expense under GAAP and a liability under IFRS.
so what is the journal entery for provisions in both cases ?

 

[Counterofbeans]

I'm not sure I'm following you here.

Expenses often generate liabilities, be it warranty, income taxes, or whatever. It doesn't matter whether it's IFRS or GAAP. You're never going to be able to calculate your expense (e.g. income tax expense or warranty) & remit cash to the taxing authority (or performs services for a warranty) simultaneously. By definition, this means you will likely have a liability.

I think you are mixing up your terms/definitions here. A "provision for income taxes" is the same as, "Income Tax Expense" and both will show as Debits. Sometimes, companies will just say, "Income Taxes" and it's understood that it's an expense, especially since it's reducing Income Before Taxes. The offsetting Credit will be to "Income Tax Payable" (or some similar name).

Note that this is a painfully simple example and the actual J/E for a company's Income Tax Provision is very complex (especially if deferreds are involved).

 

[Fidget]

Armdowidar, you've copied and pasted your post straight from wiki, haven't you?

To clarify though, in US GAAP, provisions fall under the banner of "contingencies" and the treatment is quite similar to IAS 37 on whether to provide, expense or just make a note to the accounts depending on what it is.

 

[Counterofbeans]

Armdowidar, you've copied and pasted your post straight from wiki, haven't you?

To clarify though, in US GAAP, provisions fall under the banner of "contingencies" and the treatment is quite similar to IAS 37 on whether to provide, expense or just make a note to the accounts depending on what it is.

I see the Wiki page that was quoted and I can tell you I have no idea what they are talking about. It seems like nothing more than semantics.

Please correct me if I'm wrong, but when you say "provisions fall under the banner of, "'contingencies'", you mean that under IFRS that's the definition, yes?

 

[Fidget]

Not exactly. IFRS: IAS 37 deals with provisions and contingencies, US GAAP just defines contingencies. However, under US GAAP, the conditions for "contingencies" are similar, and the same in some instances, to what IAS 37 says about provisions.

 

[Counterofbeans]

I gotcha. This seems like nothing more than a definition/semantic issue.

For the OP, there is no difference in the J/Es from the perspective of what gets expensed vs. a liability, it's just what they are calling certain items.

 

[amrdowidar]

I copied it from wiki because it is exactly what i want to ask about, thanks a lote for help

 

[Nadejda]

Hi Amrdowidar. I am taking Intermediate Accounting 2, and the book says "Accounting for contingent losses is quite similar between IFRS and U.S. GAAP. A loss contingency is accrued under U.S. GAAP if it’s both probable and can be reasonably estimated. IFRS is similar, but defines “probable” as “more likely than not,” which is a lower threshold than typically associated with “probable” in U.S. GAAP. Also, IFRS refers to these accrued liabilities as “provisions,” and refers to possible obligations that are not accrued as “contingent liabilities,” while the term “contingent liabilities” is used for all of these obligations in U.S. GAAP.

If there is a range of equally likely outcomes associated with a contingency, IFRS requires using the midpoint of the range, while U.S. GAAP requires use of the low end of the range.

Another difference in accounting relates to whether to report a long‐term contingency at its expected future value or its present value. IFRS requires reporting, present values of estimated cash flows when the effect of time value of money is material. U.S. GAAP allows using present values under some circumstances when the timing of cash flows is fixed or reliably determinable.
." I hope it will help you to understand the difference.