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Discuss A provision and a contingent liability are the same

Distinguish between a provision and a liability which is contingent

Question. Discuss A provision and a contingent liability are the same.. 

For an accountant, it is quite necessary to be able to distinguish between a provision and a liability which is contingent.

A provision is defined as a liability for which the timing of the liability and the actual amount of the liability is quite uncertain. But in general, a provision meets the criteria to be classified as a liability because the obligation is arising because of the occurrence of a past event and which when settled within the next few quarters would end of with a sizable amount of cash outflow. It also meets the criteria of recognition with the reliability of the measurement goes with the probable economic benefits being derived. 

On the other hand, the contingent liability is something for which there is an expectation of cash outflow in the future but the happening of the same is quite remote. For example, there can be affair and reliable estimation of a civil liability but the possibility of the entity losing the case and paying the amount is quite less and pretty uncertain(Deegan, 2015).

A provision, on the other hand, is something which is most likely cause a reduction in the value of an asset. For example, if the entity is estimating probable bad debts and makes a provision against receivables in excess of 60 days at 5% of the gross value then the same is likely to cause a reduction in the value of the net realizable value of the receivables. The estimation of the provision for bad debt and provision for depreciation etc. would be done quite reliably than a contingent liability.

While theprovisions made and created in a particular financial year is charged to the income statement ( a debit) the contingentliability is not charged to an income statement and shown as a footnote in the balance sheet. The provisions made by a reporting entity is shown as an expense ( charged to the income statement)  because of the reason that provisions not only meets the criteria of being a liability but also it can be estimated with reliability and thus it meets the recognition criteria as well. The contingent liability is shown as a footnote in the balance sheet is because of the reason that contingent liability meets the criteria of being a liability but no way it can be estimated with reliability and thus it fails to meet the recognition criteria. Because of these differences, the provisions are not the same as a contingent liability ad thus are treated differently despite both being liabilities(Kieso & Wayangant, 2016). 

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