The provisions in management of risks

Abstract

Provisions allow firms to defer the funds in times when they reach positive results, for the periods, in which they assume higher costs or for less economically successful periods. Similarly to allowances they are accounting items, which do not overestimate assets and revenues, and vice versa underestimate the costs and liabilities. It requires taking of all risks of loss that are known at the time of compiling of the financial statements into accounting. Reserves represent accruals in a broader sense, as they assign to the revenues generated today associated costs in order to record these revenues again in the future with the aim to eliminate the costs actually incurred. This is the way how enterprises can preclude the risks of financial distress that could arise from lack of resources needed to cover future expenses and they help to strengthen the material substance, since the creation of reserves reduces the possible distribution of the apparent profits to owners. Procedures for the creation and using of reserves are governed by Czech accounting legislation, which allows enterprises a broader application in the form of a general requirement of establishing reserves for risk and loss, while banks cannot create reserves for general banking risks and other unforeseeable risks. Differences are also among Czech and international rules on creation of reserves. In addition, there are different procedures in terms of fiscal (tax) reserves. The aim of this contribution is therefore to analyze methods of the crea­tion and using of reserves from accounting and tax perspective, especially in terms of their eligibility and entitlement and to propose modifications to enable the unification of the theoretical approaches.

Keywords

• provisions
• risks
• liabilities
• equity
• contingent liabilities