Provisions are liabilities of uncertain timing or amount: obligations the company already has because of something that happened in the past, but whose exact amount or payment date is not yet known. Recording them ensures that the financial statements show the company's obligations in full, and not only those that already have a bill attached. The rules are in CPC 25 (Provisions, Contingent Liabilities and Contingent Assets — CPCs are the Brazilian accounting pronouncements, aligned with IFRS; this one is equivalent to IAS 37), approved by the Federal Accounting Council (CFC) as NBC TG 25.In everyday use, however, the word "provision" is used for many things that are not provisions in the sense of the standard: estimated losses on customers, depreciation, the legal reserve, money set aside for working capital. In this lesson we will look at each of them, say what it really is and how it is calculated. An important warning: no provision is made for future operating losses (CPC 25, item 63); a provision always corresponds to an obligation that already exists.Provision, possible and remote contingent liabilityProvisionIt is a present obligation, arising from past events, with uncertain amount or settlement date. To be recognised, it must meet three criteria at the same time:there is a present obligation, legal (from a contract or the law) or constructive (created by the company's practices and promises);it is probable, that is, more likely than not, that resources will flow out to settle it;the amount can be reliably estimated.Accounting treatment: it is recognised in liabilities on the Balance Sheet (for example, "Provision for labour claims") and, as the counterpart, as an expense in profit or loss for the period. If the time effect is material, the amount is discounted to present value.Example: a company faces labour lawsuits and its lawyers assess the loss as probable, estimating R$ 100 thousand. It recognises a provision of R$ 100 thousand.Possible contingent liabilityIt is a possible obligation, whose existence depends on uncertain future events outside the company's control, or a present obligation that does not meet the provision criteria (the outflow is not probable or the amount cannot be reliably estimated). The probability of loss is lower than "probable" but higher than "remote".Accounting treatment: it is not recognised on the balance sheet. It is disclosed in the notes, with its nature and, when possible, an estimate of its financial effect.Example: a lawsuit in which the company has a moderate chance of losing.Remote contingent liabilityIt is an obligation whose probability of an outflow of resources is remote, that is, very small.Accounting treatment: it is neither recognised on the balance sheet nor required to be disclosed in the notes.Example: a lawsuit in which case law is broadly favourable to the company, which has already won similar cases.Probability of outflowAmount reliably estimable?TreatmentProbableYesRecognise a provision in liabilitiesProbableNoDisclose in a note (contingent liability)Possible—Disclose in a note (contingent liability)Remote—Nothing to doA company faces three lawsuits: a labour claim with a probable loss estimated at R$ 80 thousand, a civil claim with a possible loss of R$ 150 thousand and a tax claim with a remote loss of R$ 300 thousand. How much does it recognise as a provision in liabilities?Answer: R$ 80 thousand — only the claim with a probable loss and an estimable amount becomes a provision. The civil claim, with a possible loss, is disclosed in a note; the tax claim, with a remote loss, is neither recognised nor disclosed. The R$ 230 thousand figure adds probable and possible, but the possible one does not go on the balance sheet.Estimated credit losses (PECLD)The former Provision for Doubtful Debts (PDD), now called Estimated Loss on Doubtful Receivables (PECLD), records the part of accounts receivable the company does not expect to collect. Despite the old name, it is neither a CPC 25 provision nor a reserve: it is a contra account to Accounts Receivable, in assets. Under CPC 48 (equivalent to IFRS 9), the loss must be estimated based on expected credit losses, using the history of defaults adjusted for current conditions and forecasts.Historical percentage method\[ \text{PECLD} = \text{Accounts receivable} \times \text{Expected loss percentage} \]Example: if the accounts receivable balance is R$ 500,000 and the adjusted history indicates a loss of 2%:\[ \text{PECLD} = 500{,}000 \times 0.02 = 10{,}000 \]The percentage depends on the business, the customers and the payment terms; there is no "reasonable" rate that fits everyone.Ageing methodThis is the most common in practice: receivables are split by how overdue they are, and each band gets a loss percentage based on the company's history. Example with the same R$ 500,000:BandBalance (R$)Expected lossPECLD (R$)Not yet due300,0001%3,000Up to 30 days overdue120,0005%6,00031 to 90 days overdue50,00020%10,000More than 90 days overdue30,00050%15,000Total500,00034,000There is also individual analysis: for large customers or customers in judicial reorganisation, the loss is estimated case by case.Entries: when it is set up, Dr – PECLD Expense and Cr – PECLD (contra account to Accounts Receivable). When the loss is confirmed and the receivable is written off, Dr – PECLD and Cr – Accounts Receivable. Under Lucro Real (the Brazilian actual-profit tax regime), the PECLD expense is only deductible for IRPJ and CSLL (the corporate income taxes) when it meets the criteria of Law 9,430/1996 (art. 9); until then, it is added back when calculating taxable profit.A company has R$ 200,000 receivable: R$ 150,000 not yet due, with an expected loss of 2%, and R$ 50,000 more than 90 days overdue, with an expected loss of 40%. What is the PECLD?Answer: R$ 23,000 — 150,000 × 2% = 3,000 and 50,000 × 40% = 20,000; added together, R$ 23,000. The R$ 4,000 figure comes from applying 2% to the whole balance, ignoring that overdue receivables carry much higher risk.Provision for warrantiesWhen a company sells products with a warranty, at the moment of sale it takes on the obligation to repair or replace those that turn out to be defective. That is why the provision is recognised together with the sale, based on the history of defects.\[ \text{Provision for warranties} = \text{Units sold} \times \text{Defect percentage} \times \text{Average repair cost} \]Example: the company sold 10,000 units (R$ 1,000,000 in sales, at R$ 100 each); history indicates that 1% of them will be defective, and the average repair cost is R$ 100:\[ \text{Provision for warranties} = 10{,}000 \times 0.01 \times 100 = 10{,}000 \]Note that the formula uses the quantity sold, not the value of sales in reais: multiplying R$ 1,000,000 by 1% and by R$ 100 would give a meaningless number. When the company only has its history in reais, it uses warranty cost as a percentage of revenue (for example, 1% of R$ 1,000,000 = R$ 10,000).Entry: Dr – Warranty Expense and Cr – Provision for Warranties (liability). When the repair is carried out, its cost is charged against the provision.Provision for contingencies (lawsuits)The provision for contingencies covers obligations that depend on the outcome of legal or administrative proceedings (labour, civil, tax). It cannot be calculated as a percentage of revenue or profit: CPC 25 requires each case to be assessed individually, usually by the lawyers, as to the probability of loss and the estimated amount. A company with high revenue and no lawsuits has no contingency to provide for; a small company with one large lawsuit may have one.Example, using the classification seen at the beginning:LawsuitProbability of lossEstimated amount (R$)TreatmentLabourProbable80,000Provision of R$ 80,000CivilPossible150,000Disclosure in a noteTaxRemote300,000NothingEntry: Dr – Contingency Provision Expense and Cr – Provision for Labour Claims (liability): R$ 80,000. The estimate is reviewed at each balance sheet date; if the risk changes, the provision is increased, reduced or reversed.A percentage of revenue can be used in the budget, as a management cash reserve for the unexpected, but that is not an accounting provision and does not go on the balance sheet.Depreciation (not a provision)People used to speak of a "provision for depreciation", but depreciation is not a provision: it does not represent an obligation, but the allocation of the cost of an item of property, plant and equipment over its useful life (CPC 27, equivalent to IAS 16). On the balance sheet it appears as Accumulated Depreciation, a contra-asset account. The straight-line formula is:\[ \text{Annual depreciation} = \frac{\text{Cost of the asset} - \text{Residual value}}{\text{Useful life in years}} \]Depreciation is calculated asset by asset (or by groups of similar assets), never on "total assets": cash, inventories, receivables and land are not depreciated.Example: machinery that cost R$ 100,000.00, with a useful life of 10 years and a residual value estimated at 10% of cost (R$ 10,000.00):\[ \frac{100{,}000 - 10{,}000}{10} = \frac{90{,}000}{10} = 9{,}000 \]The company recognises R$ 9,000.00 of depreciation expense a year (R$ 750.00 a month) until the machinery reaches its residual value of R$ 10,000.00. Entry: Dr – Depreciation Expense and Cr – Accumulated Depreciation.Sick leave: why it is not provided forBy law, the company pays the salary for the first 15 days of sick leave; from the 16th day, the employee receives the benefit from the INSS, Brazil's social security institute (Law 8,213/1991, art. 60). Under CPC 33 (Employee Benefits, equivalent to IAS 19), paid absences that do not accumulate, such as sick leave, are recognised as an expense only when they occur. That is why no accounting provision is made for future illness.What the company can do is include this cost in its budget, as a management estimate:\[ \text{Estimated cost} = \frac{\text{Monthly salary}}{30} \times \text{Expected days of absence} \times (1 + \text{Payroll charges}) \]Example: salary of R$ 3,000, a historical average of 10 days of absence a year and payroll charges of 35.8% (see the next section):\[ \frac{3{,}000}{30} \times 10 \times 1.358 = 1{,}358 \]That is, about R$ 1,358 per employee per year, or 3.8% of the annual salary (R$ 36,000), for the budget, not for the balance sheet.Payroll provisions: vacation, 13th salary and chargesHere there are indeed provisions in the accounting sense (technically, accrued liabilities). For each month worked, an employee in Brazil earns the right to 1/12 of the 13th salary (a mandatory extra month's pay each year) and 1/12 of paid vacation, plus the constitutional one-third vacation bonus. Under the accrual basis, the company recognises these obligations month by month, and not only when it pays them, together with the charges that will apply to them.Percentages of salary13th salary: 1/12 of salary per month = 8.33%;Vacation: 1/12 of salary per month = 8.33%;Constitutional 1/3 vacation bonus: 1/3 of 8.33% = 2.78%; vacation + 1/3 = 11.11%;Charges on these amounts: 20% employer INSS, RAT (occupational accident insurance) of 1% to 3% (adjusted by the FAP factor), third-party contributions (generally 5.8% for industry and trade: education salary 2.5%, Incra 0.2%, Sesi or Sesc 1.5%, Senai or Senac 1.0% and Sebrae 0.6%) and FGTS (severance fund) of 8%. With a 2% RAT, the total is 35.8%.Important corrections to tables that circulate widely: PIS on payroll (1%) is paid only by non-profit entities, not by companies in general, which pay PIS on revenue; Incra (0.2%) is also paid by urban companies, not only rural ones; and Sesi (1.5%) and Senai (1.0%) add up to 2.5%, not 1.5%. Companies in the sectors still under payroll tax relief pay, in 2026, 10% employer contribution on payroll (plus 60% of the contribution on gross revenue), in a transition back to 20% in 2028.Monthly calculation exampleEmployee with a salary of R$ 3,000.00, in a company under Lucro Presumido or Lucro Real, with charges of 35.8%:ItemCalculationMonthly amount (R$)13th salary provision3,000 ÷ 12250.00Vacation provision3,000 ÷ 12250.001/3 vacation bonus250 ÷ 383.33Subtotal583.33Charges on the subtotal583.33 × 35.8%208.83Total provided for in the month792.16That is R$ 792.16 a month, or 26.4% of salary. Over 12 months, the company will have provided R$ 3,000.00 for the 13th salary, R$ 4,000.00 for vacation with the one-third bonus and R$ 2,506.00 for charges (35.8% of R$ 7,000.00), a total of R$ 9,506.00.Monthly entry: Dr – 13th Salary, Vacation and Charges Expense (profit or loss) and Cr – 13th Salary Provision, Vacation Provision and Charges on Provisions (Current Liabilities). On payment, the provision is charged against cash.Note: INSS and FGTS on the month's salary itself are not provisions; they are certain obligations for the month (charges payable). And the 40% FGTS penalty on dismissal without cause (equivalent to 3.2% of salary per month worked) only becomes a liability when the company decides to dismiss; before that, it may enter the budget as a potential cost, but it is not an accounting provision.Simples Nacional companiesUnder the Simples Nacional (Brazil's simplified tax regime for small businesses), the employer's INSS and third-party contributions are included in the DAS, the single monthly payment slip (except for activities in Annex IV, which pay the employer contribution separately). On vacation and the 13th salary, therefore, only the 8% FGTS applies:ItemMonthly amount (R$)13th + vacation + 1/3583.33FGTS on the subtotal (8%)46.67Total provided for in the month630.00That is R$ 630.00 a month, or 21% of salary.A company under Lucro Presumido pays a salary of R$ 6,000 and has charges of 35.8% on vacation and the 13th salary. How much must it provide each month for vacation, the 1/3 bonus and the 13th salary, including charges?Answer: R$ 1,584.34 — 13th: 6,000 ÷ 12 = 500; vacation: 500; 1/3: 166.67; subtotal: 1,166.67; charges: 1,166.67 × 35.8% = 417.67; total: 1,584.34. The R$ 1,166.67 figure is only the pay itself, without the charges that will apply when it is paid.Cash needed for working capital (not a provision)Setting money aside for working capital is a financial decision, not an accounting entry. Even so, the calculation is useful. When a company collects from customers after paying suppliers and expenses, it has to finance that timing gap:\[ \text{Cash needed} = \frac{\text{Monthly outflows}}{30} \times (\text{Average collection period} - \text{Average payment period}) \]The periods are measured in days, so the monthly outflow is divided by 30 to become a daily outflow. Companies with inventory should also add the average inventory period (the full cash conversion cycle is inventory days + collection days − payment days).Example:Monthly outflows (salaries, rent, bills, suppliers): R$ 100,000Average collection period: 45 daysAverage payment period: 30 days\[ \frac{100{,}000}{30} \times (45 - 30) = 3{,}333.33 \times 15 = 50{,}000 \]The company needs about R$ 50,000 available (in cash or a credit line) to cover the 15 days between paying and collecting. Multiplying the monthly amount directly by the days would give R$ 1,500,000, a figure 30 times larger than the correct one.A company spends R$ 60,000 a month, collects from customers in 40 days and pays suppliers in 25 days. How much cash does it need to cover this timing gap?Answer: R$ 30,000 — the daily outflow is 60,000 ÷ 30 = 2,000; the timing gap is 40 − 25 = 15 days; 2,000 × 15 = 30,000. The R$ 900,000 figure comes from multiplying the monthly spending by the days without converting it to a daily amount.Taxes payableTaxes calculated for a period and not yet paid are recorded in liabilities as taxes payable. In general they are not provisions in the CPC 25 sense, because the amount is known; what matters is recognising them in the month in which the taxable event occurs (accrual basis), and not only in the month of payment.Simples Nacional: the DAS is paid every month, at an effective rate that depends on gross revenue over the last 12 months and on the annex of the activity. If the effective rate is 6% and the month's turnover is R$ 50,000, the company records R$ 3,000 of Simples Nacional payable.Lucro Presumido (presumed-profit regime): PIS and Cofins are calculated monthly; IRPJ and CSLL quarterly, on a percentage of revenue (for example, 8% and 12% in trade, 32% and 32% in services). Since 2026, the portion of annual revenue above R$ 5 million has these percentages increased by 10% (Complementary Law 224/2025).Lucro Real: IRPJ and CSLL on adjusted profit, calculated quarterly or by monthly estimates with an annual adjustment.Entry: Dr – Tax Expense (or revenue deduction) and Cr – Tax Payable (liability). Tax disputes with a probable loss (a contested tax assessment, for example), on the other hand, follow the contingency rule.Legal reserve (not a provision)The legal reserve is neither a provision nor an expense: it is an appropriation of net profit, recorded within equity, to protect share capital. Under Law 6,404/1976 (the Brazilian Corporations Law, art. 193), 5% of each year's net profit goes to the legal reserve before any other appropriation, until it reaches 20% of share capital. The company may skip it in a year in which the legal reserve plus capital reserves exceeds 30% of share capital.Example: share capital of R$ 90,000, legal reserve already set up of R$ 16,000 and net profit of R$ 60,000. 5% of profit would be R$ 3,000, but the limit of 20% of capital is R$ 18,000; only R$ 2,000 more fits. Entry: Dr – Retained Earnings and Cr – Legal Reserve: R$ 2,000.SummaryItemWhat it is and where it appearsBasis of calculationProvision for contingenciesProvision (liability), only for probable lossesAssessment of each lawsuitProvision for warrantiesProvision (liability)Units sold × % defective × repair costPECLD (formerly PDD)Contra account to Accounts Receivable (asset)Receivables × expected loss by bandVacation, 1/3 and 13th salaryPayroll liability, month by monthSalary ÷ 12 (+ 1/3 for vacation) + chargesDepreciationContra account to property, plant and equipment (asset)(Cost − residual value) ÷ useful life, asset by assetTaxes payableObligation (liability)Rules of each taxLegal reserveProfit reserve (equity)5% of net profit, up to 20% of share capitalSick leaveExpense when it occurs; estimate only in the budgetExpected days × daily salary × (1 + charges)Working capitalFinancial decision, outside the accountsDaily outflow × (collection days − payment days)Exercises1) (Instituto Consulplan - 2025 - Câmara de Araraquara - SP - Contador) A corporation (Sociedade por Ações) presented, on 12.31.20x1, before determining the result for the year, the following Equity:• Share Capital: R$ 90,000.00;• Legal Reserve: R$ 16,000.00;• Statutory Reserve: R$ 2,000.00;• Capital Reserve: R$ 8,000.00;• Net Profit for the year: R$ 60,000.00.According to Law No. 6,404/1976 and subsequent amendments, the amount to be allocated to the Legal Reserve and the accumulated balance of that Reserve will be, respectively, (R$):A) 1,000.00; 17,000.00.B) 1,500.00; 17,500.00.C) 2,000.00; 18,000.00.D) 2,500.00; 18,500.00.E) 3,000.00; 19,000.00.2) (IBFC - 2024 - Prefeitura de Feira de Santana - BA - Contador) According to corporate law, of the net profit for the year, 5% (five percent) will be applied, before any other appropriation, to the constitution of the ______, which shall not exceed 20% (twenty percent) of share capital. Select the alternative that correctly fills the blank.A) Statutory reserveB) Contingency reserveC) Tax Incentive reserveD) Legal reserve3) (CESPE / CEBRASPE - 2025 - EMBRAPA - Técnico – Área: Orçamento E Finanças – Subárea: Contabilidade) Judge the following item, according to CFC Resolution No. 1,374/2011, which deals with the conceptual framework for the preparation and presentation of financial reports: "Provisions are liabilities whose measurement requires the use of a significant degree of estimation."A) TrueB) False4) (CESPE / CEBRASPE - 2025 - FUNPRESP-EXE - Analista de Previdência Complementar - Área 11: Contabilidade) A certain company was party to several lawsuits on 12/31/2024, with uncertain timing. The following table details the nature of these lawsuits, the probability of an outflow of resources, the measurement and the estimated amount.Based on the hypothetical situation presented, judge the following item. "According to NBC TG 25, the total amount of contingent liabilities that the company must disclose in its balance sheet as a provision is R$ 500,000."A) TrueB) False5) (VUNESP - 2025 - Prefeitura de Sertãozinho - SP - Fiscal Tributário) Select the alternative that gives an example of a liability account.A) Goodwill (premium on expected future profitability).B) Equity valuation adjustment.C) Accumulated depreciation.D) Estimated loss on doubtful receivables.E) Provisions for warranties.6) (IF-ES - 2025 - IF-ES - Técnico em Contabilidade) According to NBC TSP 03 – "Provisions, Contingent Liabilities and Contingent Assets", the following are conditions for recognising a provision, EXCEPT:A) It is a present obligation.B) It necessarily refers to a formalised obligation.C) It arises from a past event.D) It is probable that an outflow of resources embodying economic benefits or service potential will be required to settle the obligation.E) The amount of the obligation can be reliably estimated.Answer Key1) C. 5% of 60,000 = 3,000, but the limit is 20% of 90,000 = 18,000; since 16,000 is already there, only 2,000 is set aside, and the balance becomes 18,000. (The legal reserve plus capital reserves add up to 24,000, below 30% of capital, 27,000, so setting it aside cannot be skipped.)2) D. It is the legal reserve (Law 6,404/1976, art. 193).3) A. Measuring provisions depends on significant estimates.4) A. Only the tax lawsuit, with a probable outflow and a reliable estimate, becomes a provision on the balance sheet: R$ 500,000. The possible ones (warranties, R$ 130,000, and civil, R$ 120,000, totaling R$ 250,000) are contingent liabilities and only appear in the notes; the remote one (labor) is not even disclosed. The statement calls the provision a contingent liability, which is not strictly correct, but the amount to be recognized as a provision is indeed R$ 500,000.5) E. The provision for warranties is an obligation (liability). Accumulated depreciation and PECLD are contra-asset accounts; equity valuation adjustment is in equity; goodwill is an asset.6) B. The obligation may be legal or constructive; it does not need to be formalised.
ردود الفعل
0
0 تعليقات
كن أول من يعلق
لا شيء هنا بعد.