What are provisions in a balance sheet and how are they created?
November 29, 2023 | 50,00 EUR | answered by Laura Hohenwarter
Dear tax advisor,
My name is Laura Büchner and I am the managing director of a medium-sized company. In our balance sheet, provisions are listed, of which I am not exactly sure how they are formed and what impact they have on our financial situation. I have heard that provisions are used to cover future obligations that have not yet occurred as of the balance sheet date, but are likely to occur. I would like to understand how provisions are disclosed in a balance sheet and how I can ensure that they are formed and valued correctly.
Currently, I am particularly concerned about the tax implications of provisions and whether we should possibly create provisions for obligations that we have not yet accounted for in our balance sheet. I want to make sure that we comply with all legal requirements and present our financial situation transparently.
Can you please explain to me how provisions are formed in a balance sheet and what criteria need to be considered? Are there specific regulations that we need to follow in order to correctly disclose provisions? What tax aspects need to be taken into account when forming provisions and what impact do they have on our profit and loss statement?
Thank you in advance for your support.
Sincerely,
Laura Büchner
Dear Mrs. Büchner,
Thank you for your inquiry regarding provisions in your balance sheet. Provisions are important in a company's balance sheet as they serve to cover future obligations that have not yet occurred as of the balance sheet date but are likely to occur. By forming provisions, companies can ensure that they are financially prepared for these obligations and transparently present their financial situation.
Provisions are formed in accordance with the principles of proper accounting (GoB). The key criteria to consider when forming provisions include the likelihood of the liability occurring, the amount of expected costs, and the expected due date of the obligation. It is crucial that provisions are formed based on objective criteria and reliable estimates, taking into account risks and uncertainties.
To ensure that provisions are correctly reported, certain regulations must be followed. Provisions must be clearly and distinctly stated in the balance sheet, either as a separate item or as part of another item, e.g. under liabilities. Additionally, provisions must be regularly reviewed and adjusted as necessary to ensure they align with current developments.
Regarding the tax implications of provisions, it is important to note that provisions are generally tax deductible as long as they comply with legal requirements. However, certain provisions may be tax restricted or not deductible at all, e.g. if they are excessive or do not comply with general tax regulations. Therefore, it is important to carefully examine provisions in terms of their tax implications.
In summary, it is crucial that provisions in your balance sheet are correctly formed and evaluated to comply with both legal requirements and tax regulations. I recommend consulting with an experienced tax advisor to professionally review and potentially optimize your provisions.
I hope that my explanations are helpful to you and I am available for any further questions.
Sincerely,
Laura Hohenwarter
