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9. Provisions

 The issue

In business accounting, there are three degrees of “promises”: liabilities, provisions and contingent liabilities. Their definitions are the following. A liability  is a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits or service potential. A provision is a liability of uncertain timing or amount. A contingent liability is a possible obligation that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity.  While there is a difference between a liability and a provision, both are to be recorded in the balance sheet and thus affect the main balancing items (such as profit), while contingent liabilities are to be recorded only as memorandum items, and do not affect the main balancing items. Another similar business accounting concept, but on the asset side, is impairment of assets.

There is no clear corresponding definition of provisions or impairment of assets in the SNA. First, the SNA doesn’t even include a definition of a liability (there is a definition of an asset, but not of a liability).  Second, while the 1993 Rev. 1 has made some small progress by recognizing more “provisions” than before (in particular for non-life insurance), it does not give any general or consistent recommendation on “provisions”.  Some promises that would be qualified as provisions in business accounting are now implicitly recognised in the SNA, but without using the word and strangely, with different impacts on the accounts. For example, the following are recognised implicitly: depreciation, pension provisions, terminal costs of equipment (e.g. provisions for dismantling nuclear power stations), non-life insurance provisions, impairment of assets for non-performing loans. However, while the first four will impact the net saving and net lending/borrowing of the entity, the last one is a kind of memorandum item that neither affects net saving nor net lending/borrowing.  At the same time, the SNA ignores a number of other provisions recognised in business accounts.  For example, SNA 1993 Rev. 1 includes provisions for standardized loan guarantees but does not mention the very common provision for standardized equipment guarantees, without any rationale for this difference in treatment.

 Reasons for inclusion in the Research Agenda

It seems that the main reason for which national accountants reject a systematic incorporation of provisions is the fact that provisions can appear, contrary to liabilities, in the balance sheet of one entity and not, at the same time, as a counterpart entry in the balance sheet of another entity.  The quadruple entry rule is thus not verified (some say the symmetry of the tables is not ensured).  This happens essentially because a provision is something that is recognised by the entity which makes the promise (for example a provision for dismantling costs) and, forcibly, not by a counterpart entity1  (which can even be not known at the time of the provision2).  
However, this argument of asymmetry is very weak when set against the need of users of the SNA to show the real situation of entities regarding their balance sheet and main balancing items. For example, today, the SNA overestimates the net worth of banks (by not taking into account impaired loans), and shows a biased measure of their profits, by not taking into account the change in their stock of impaired loans.  This non-recognition of the principle of provisions will be even more difficult to sustain in the future as national accounts attempt to show accurate accounts for general government, when governments are more and more likely to record provisions themselves, as recommended by the International Public Sector Accounting Standards Board (IPSASB).  When a major provision will be recorded by a government, with no corresponding record in the SNA version of the accounts, the inconsistency will become obvious.

It is therefore proposed to include in the short-term in the research agenda of the SNA the item “provisions” with the objective of: (1) incorporating a future global recommendation on provisions in the SNA, (2) exploring a flexible treatment for both the stocks (e.g. the creation of a special additional, asymmetrical account as part or in addition to OCV) and the flows (e.g. creating additional, asymmetric, balancing items of operating surplus, saving and net lending/borrowing), with the objective of recording the stock of provisions and/or the stock of assets at impaired value, the changes in the stock of provisions and impaired assets and their impact on the main balancing items, thus reducing the gap between business accounts and national accounts.  The project should explore also recommendations regarding the consolidation of provisions (see reference paper attached).
1 The sentence could also apply to loan impairments, which are recorded by the bank but not by the debtor.  Note that fixed assets have no counterpart, so that the notion of financial assets having no counterparts is not a heresy.
2 E.g. when the provision for dismantling cost is recorded, no one knows which enterprise will get the contract of dismantling which may occur thirty years ahead…


The treatment of provisions in the national accounts: elements for the review of the SNA, François Lequiller, STD/NAES(2004)7, paper presented at the 2004 OECD Working Party on National Accounts.

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