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We have bought a machine for 10 million dollars and if there is cleaning up costs after 10 years, we have to set up provision for . Here we are setting up provision from the definition that the present obligation as a result of past events.
However, when a regulator has requested us to change our manufacturing process which costs us 4 million, here we are not setting provision because this relates to future operations.
How can this be?
Because we have the option of NOT changing our manufacturing processes – we could simply abandon that process! In addition, if we DO decide to spend the 4m, that would not be the subject of a provision – it would simply be an addition (probably) to the cost of the asset (subsequent expenditure improving the earning capacity of the asset)
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