Provisions are recognized if it is probable that an outflow of resources will be required to settle the obligation.Group of answer choicesTrueFalse
Question
Provisions are recognized if it is probable that an outflow of resources will be required to settle the obligation.
Group of answer choices
- True
- False
Solution
Answer
The statement is True.
Provisions are accounted for under the principle of recognizing liabilities when it is probable that there will be an outflow of resources to settle an obligation. According to accounting standards like the International Financial Reporting Standards (IFRS) and generally accepted accounting principles (GAAP), a provision is recognized when:
- A present obligation exists as a result of a past event.
- It is probable that an outflow of resources embodying economic benefits will be required to settle the obligation.
- A reliable estimate can be made of the amount of the obligation.
If these criteria are met, a provision should be recorded in the financial statements.
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