Discounting a provision
Use a pre-tax rate reflecting current market assessments of the time value of money and risks specific to the liability, without double counting risks already reflected in cash flows. As the settlement date approaches, increase the provision for the passage of time; this unwinding is recognised as a borrowing cost. Review both the estimate and discount rate at each reporting date, with special rules for related asset adjustments where applicable.
Worked example
An entity must pay $110,000 in one year. At a suitable 10% annual discount rate, the initial provision is $100,000. After one year, $10,000 unwinding increases it to $110,000, assuming no other change.
Common mistake
Discounting immaterial timing differences automatically, or forgetting that the liability grows as the discount unwinds.
Where it appears in your exams
| Qualification | Exam | Relationship | Period |
|---|---|---|---|
| ACCA | FR | Direct | September 2026–June 2027 |
| ACCA | SBR | Direct | September 2026–June 2027 |