• What IFRS Calls a Provision (IFRS)
  • How US GAAP Treats Contingent Liabilities (US)

An accounting provision is an amount a business records now for an obligation it expects to pay but whose timing or amount isn't certain yet, such as warranty repairs or a lawsuit it's likely to lose. "Provision" is the term used in IFRS Accounting Standards, where IAS 37 says "A provision is a liability of uncertain timing or amount." Under US GAAP, as the OpenStax textbook describes it, the probable and estimable case is recorded as a contingent liability. For amounts customers may not pay, US textbooks use a related estimate, the allowance for doubtful accounts, which reduces receivables rather than being a liability.

Billed publishes this page. US definitions are quoted from OpenStax, Principles of Accounting, Volume 1: Financial Accounting, chapters 9 and 12, and the IFRS quotes from the IFRS Foundation's IAS 37 page, all opened on October 30, 2026. This page doesn't cover tax treatment; ask your accountant.

What IFRS Calls a Provision (IFRS)

The IFRS Foundation's IAS 37 page says: "A provision is a liability of uncertain timing or amount." It adds: "An entity recognises a provision if it is probable that an outflow of cash or other economic resources will be required to settle the provision. If an outflow is not probable, the item is treated as a contingent liability."

On contingent liabilities, the same page says: "A contingent liability is not recognised in the statement of financial position. However, unless the possibility of an outflow of economic resources is remote, a contingent liability is disclosed in the notes." Under IFRS, the item that is recorded is the provision.

How US GAAP Treats Contingent Liabilities (US)

OpenStax's chapter 12 key terms define a contingent liability as an "uncertain outcome to a current condition that could produce a future debt or negative obligation for the company". Section 12.3 notes the difference in terms: "Where US GAAP uses the term “contingencies,” IFRS uses “provisions.”"

Its section 12.3 describes four treatments, depending on how likely the outcome is and whether it can be estimated:

  • Probable and estimable: "If the contingency is probable and estimable, it is likely to occur and can be reasonably estimated. In this case, the liability and associated expense must be journalized and included in the current period’s financial statements (balance sheet and income statement) along with note disclosures explaining the reason for recognition."
  • Probable and inestimable: "a note disclosure is required in financial statements, but a journal entry and financial recognition should not occur until a reasonable estimate is possible."
  • Reasonably possible: "it should not be journalized or financially represented within the financial statements."
  • Remote: "no journal entry or note disclosure in financial statements is necessary."

Warranties a business gives on what it sells are an example of the first case; the worked example below shows one.

Allowances for Customers Who Don't Pay (US)

For amounts customers owe that may not be collected, OpenStax uses an allowance. Its chapter 9 key terms define the allowance for doubtful accounts as a "contra asset account that is specifically contrary to accounts receivable; it is used to estimate bad debt when the specific customer is unknown". That makes it an estimate on the asset side, related to a provision but not a liability. For bad debts and how to reduce them, see what is bad debt.

Worked Example: A Warranty Liability (US GAAP, sample figures)

These are sample figures for a fictional shop, invented for this example, following the OpenStax US textbook treatment. It sells 400 items in the year at $250.00 each, with a one-year repair warranty. From past years, it expects 4% of items to need a repair costing $60.00 on average.

Year-end estimate: 400 × 4% = 16 repairs × $60.00 = $960.00

Entry at year-end: debit Warranty Expense $960.00; credit Warranty Liability $960.00. Debits equal credits.

Next year, repairs cost $700.00 in cash: debit Warranty Liability $700.00; credit Cash $700.00.

Warranty liability left: $960.00 − $700.00 = $260.00, to be reviewed against actual repair experience.

Under US GAAP, as OpenStax describes it, the expense is recorded in the year of the sales, as a probable and estimable contingency, not in the year the repairs are paid. Under IFRS, the IAS 37 page lists "warranty obligations" among its examples of provisions; if you report under IFRS, ask your accountant how to measure and record one.

Provisions in Other Countries' Rules

This page covers the IFRS term and US textbook treatment only. If you report under another country's rules, such as French accounting practice, ask your accountant which rules apply.

When This Guide Isn't for You

If you're dealing with a lawsuit, a product recall, a restructuring or an onerous contract, or you report under IFRS, ask your accountant how to measure, record and disclose it.

Related Guides

FAQ

What is a provision in accounting?

Under IFRS, the IFRS Foundation's IAS 37 page says "A provision is a liability of uncertain timing or amount." Under US GAAP, as OpenStax describes it, the probable and estimable case is recorded as a contingent liability. The allowance for doubtful accounts, by contrast, is a related estimate on the asset side, not a provision.

What is a contingent liability?

Under US GAAP, OpenStax defines it as an "uncertain outcome to a current condition that could produce a future debt or negative obligation for the company". Under IFRS, the IAS 37 page says "Contingent liabilities are possible obligations whose existence will be confirmed by uncertain future events that are not wholly within the control of the entity."

When is a contingent liability recorded in the accounts?

It depends on the framework. Under IFRS, the IAS 37 page says "A contingent liability is not recognised in the statement of financial position." It's disclosed in the notes "unless the possibility of an outflow of economic resources is remote". Under US GAAP, OpenStax says "If the contingency is probable and estimable," then "the liability and associated expense must be journalized and included in the current period’s financial statements". In this page's US GAAP sample, the shop records a $960.00 warranty liability at year-end.

Is an allowance for doubtful accounts a provision?

No, not under the definitions on this page. The IAS 37 page says "A provision is a liability of uncertain timing or amount." OpenStax defines the allowance for doubtful accounts as a "contra asset account that is specifically contrary to accounts receivable". The allowance is a related estimate that reduces receivables, not a liability.

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