Provisions

An amount set aside for an obligation that is probable and can be estimated, even though the exact amount and timing are not yet known. Warranty costs, doubtful debts, employee benefits and restructuring commitments are the usual cases.

A consumer-durables firm with ₹4,800 crore of revenue that expects warranty claims of 1.5% of sales provides ₹72 crore this year and uses it up as claims come in.

Provisions matter to an analyst because they work both ways. Creating a large provision in a bad year and releasing it in a good one smooths reported profit without any change in the business. In the notes, a movement schedule starts from the opening balance and shows additions and utilisation before reversals. Read the reversals column.

When reversals are unusually large, part of that year's profit was earned in an earlier period.