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As we all have known depreciation & doubtful debts are to be provided as a provision in the accounts of an entity, it contradicts with IAS 37 definition of a provision.
IAS 37 states
All provisions are liabilities,and to be a provision it should satisfy three requirements as to
1.It being a obligation by the entity.
2.A reliable estimate could be made of the obligation.
3. It will result in an outflow of resources when settled.
So given the definitions of a provision how could depreciation & doubtful debts be provided as an provision.Both are not liabilties for an entity and does not satisfy all three requirements mentioned as in IAS 37 to be called as a provision.Consider these examples:
1. If all debtors for an example where found to be irrecoverable and were treated as bad debts,it will be written off as an EXPENSE in the accounts in the relevant financial year, but if say, 20% were found to be doubtful debts how can we categorize that as a LIABILITY(given that all provisions are liabilities)?.
2. How could depreciation charged against profits be an liability? How does an obligation arise through the usage of an asset? shouldn’t it be treated as an allowance to show the relevant usage of the asset in the given financial year?
So shouldn’t IAS 37 be revised and Depreciation and doubtful debts be treated as an- Allowance/usage cost for the year rather than terming it as a provision?@saajidh
Great Post!
Provisions used to be a favourite way to manipulate performance and smooth income because of the flimsy principles.
The new standard IAS 37 has solved many of these problems.
As you correctly mentioned all provisions are liabilities of uncertain timing or amount subject to a 3 point criteria. Provisions for bad debts and depreciation fail the criteria and are not the type of provisions mentioned in IAS 37.
They are contra accounts or adjustments to the carrying value of assets and are dealt with in other standards like
IAS 36, IAS 39 & IAS 16.
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