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Hello sir,
I am a bit confused on a basic concept. Why don’t we recognise a liability or create a provision for interest charges that we will incur in the future that we know with certainty ?
My sincere gratitude for your help
Hi,
The key is to go back to the definition of a liability – “A present obligation of the entity to transfer an economic resource as a result of past events”. The obligation to pay interest is not a present obligation but one that arises in the future when the interest accrues on the outstanding loan balance, hence there is not liability created.
It definitely wouldn’t be a provision as a provision is accounting for uncertainty and there is no uncertainty surrounding the interest on the loan.
Thanks and I hope that clears it up for you.
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