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 releases it as claims come in.

The line matters to an analyst because it is two-way. Creating a large provision in a bad year and releasing it in a good one smooths reported profit without any change in the business. The movement schedule in the notes shows opening balance, additions, utilisation and reversals, and the reversals column is the one to read.

A year with unusually large reversals is a year whose profit was partly earned in an earlier period.