Provision
A provision is a liability recognised for an obligation whose timing or amount is uncertain, booked once a past event has created a current duty that will more likely than not require a quantifiable outflow.
See it move
A provision is booked when three conditions hold: a past event created a present obligation, an outflow is more likely than not, and the amount can be reliably estimated. A warranty provision is created at the point of sale, not when a claim arrives. When an outflow is only possible, or the amount cannot be estimated, the item is disclosed as a contingent liability instead.
Check yourself
Rondel Ltd manufactures electrical appliances under a one-year warranty. Past experience shows 3% of units sold require repairs averaging €120 each. In the current year 10,000 units were sold. How should Rondel account for the warranty at year end?