TUTORIAL
CHAPTER 4: PROVISION
Provision is an existing liability of uncertain timing or uncertain amount. It has the same
thought sa liability dahil pareho itong pagkakautang or obligation but what set them apart is
liability is certain like kapag umutang ka sa banko, alam mo kung magkano ang babayaran mo
at kailan mo ito babayaran. But as to provision, the word uncertain is highlighted like merong
obligation pero walang kasiguraduhan kung kailan babayaran at kung magkano ang babayaran.
Later I’ll give an example.
Punta muna tayo on how Provision is recognize. There are three conditions for a
provision to qualify for recognition, there must be a present obligation as a result of part event,
there is a probable outflow of resources and the amount of obligation can be measured reliably.
Doon muna tayo sa unang condition, for it to be a provision there has to be a present
obligation may it be legal or constructive obligation, as a result of past events. Kung
papakinggan natin, familiar siya kasi this is how we defined liability, itself. Legal obligations are
obligations arises because of law and contracts as for Constructive, there is no written or oral
agreement for the obligation but then, due to the established pattern of practice of the entity it is
like they have obligated theirself and accepted a certain responsibility na nag-result for other
party to have what we called “valid expectation” example nito ay this entity has always practice
refunding customers kapag nakatanggap sila ng defective product, parang nagkaroon na ng
established policy. This will indicate that the entity is ready to accept responsibility for defective
products, and as a result magkakaroon ng valid expectation and market for rebates for all faulty
products that were actually sold by the entity.
Next condition is, there is a probable economic outflow of resources to settle the
obligation. Ayan, may probability na magbabayad ka ng obligation mo. For us to understand
this, define muna natin kung ano ang “Probable” meaning mas mataas ‘yung chance na
mangyari ‘yung isang bagay kaysa hindi siya mangyari. Now sa accounting nagbigay sila ng
percentages para malaman whether it is still under the probable or sa iba na naka-category.
[page 98] when we see possible, remote, certain, and impossible sa problem, we usually just
ignore it and ang probable lang ang pinapansin since sa Provision, we are dealing with
uncertainties.
Last condition is that the amount of the obligation can be measured reliably. Dito na
papasok ‘yung tinatawag nating best estimate. Which is the amount that the entity would
rationally pay to settle the obligation. Sa provision kasi syempre need natin i-record ‘yan and
paano natin siya mare-record kung walang amount? Kaya we do estimation. May tatlo kasing
scenario sa pagkuha ng best estimate, where single obligation is being measured, where there
is a range of possible outcome, and where there is a large population of items. Focus tayo doon
sa dalawa kasi dito na papasok ‘yung approach.
Sa range where merong binigay na highest and lowest points and kukunin natin doon na
measurement ng provision ay ‘yung midpoint which is the average. Add lang ‘yung highest and
lowest tapos divide sa two. For the sample, go to page 113, problem 4-1, the third lawsuit. It is
as long as same ang probability nilang dalawa.
Kapag naman there is a large population of items, gagamit na tayo ng expected value
which we can see in the illustration.