Provisions and contingent liabilities explained

2 min read

ProvisionProbable, estimable

ContingentPossible, disclosed

On the balance sheetOr in notes

What a provision is

A provision is a liability of uncertain timing or amount that is probable and can be reliably estimated — for example, a likely legal settlement, warranty claims, or dilapidations on a leased property. It goes on the balance sheet as a liability and reduces profit when created, matching the cost to the period it relates to.

What a contingent liability is

A contingent liability is a possible obligation that depends on a future event, or one that is probable but cannot be reliably measured. It is not recognised on the balance sheet but is disclosed in the notes — a court case with an uncertain outcome, a guarantee given, a disputed claim. It is a flag, not a figure.

Why the distinction matters

The line between the two decides whether a cost hits the balance sheet now or sits in the notes. It shapes reported profit and net assets, so directors and auditors take the judgement seriously. Overstating provisions understates profit; ignoring a real obligation overstates it.

What a lender reads into them

A lender scanning your accounts checks provisions and contingent liabilities for future cash demands the headline numbers hide. Large or growing provisions, or worrying contingencies in the notes, temper how much risk they will take. Transparency here builds credibility.

Planning for the outflow

When a provision crystallises into a real payment, it can strain cash. Short-term finance covers a known obligation while trading continues.

Credicorp lends to your company, not to you personally, and takes no personal guarantee. See indicative terms on business loans, or apply online in minutes.

Frequently asked questions

What is the difference between a provision and a contingent liability?

A provision is a probable liability of uncertain timing or amount that can be reliably estimated, and it goes on the balance sheet. A contingent liability is only possible, or cannot be reliably measured, so it is disclosed in the notes but not recognised.

Do provisions reduce my profit?

Yes. Creating a provision recognises an expected future cost now, reducing profit in the period it is made, so the cost is matched to the right period rather than appearing only when paid.

Why do lenders look at contingent liabilities?

Because they reveal possible future obligations the headline figures do not show — lawsuits, guarantees, disputed claims. Significant contingencies affect how much risk a lender will take, so clear disclosure helps your case.