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General Provisions

What are 'General Provisions'

General provisions are balance sheet items representing funds set aside by a company as assets to pay for anticipated future losses. For banks, a general provision is considered to be supplementary capital under the first Basel Accord. General provisions on the balance sheets of financial firms are considered to be a higher risk asset, because it is assumed that the underlying funds will be in default in the future.

Explaining 'General Provisions'

Account names for general provisions either vary with the type of account or may be listed as a consolidated figure in parentheses next to accounts receivable (AR).

General Provisions for Companies

A company that records transactions and works with customers through AR may show a general provision on the balance sheet for bad debts or for doubtful accounts. The amount is uncertain, since the default has not yet occurred, but is estimated with reasonable accuracy based on company history. For example, the company may analyze write-offs from the prior accounting year when establishing general provisions for doubtful accounts in the current year. When a write-off is used for clearing a specific account, the amount is transferred to bad debt expenses.

General Provisions for Financial Institutions

Because of international standards, banks and other lending institutions are required to carry enough capital to offset risks. The standard may be met by indicating on the balance sheet either an allowance for bad debts or a general provision. The reserve funds provide backup capital for risky loans that may default.

Specific Provisions

A specific provision is created for receivables facing serious financial problems or for a trade dispute with the entity. The balances may be noted by examining an aged receivable analysis detailing the time elapsed since creating the document. Long-outstanding balances may be included in the specific provision for doubtful debts. However, a specific provision may not be created for the entire amount of the doubtful receivable. For example, if there is a 50% chance of recovering a doubtful debt for a certain receivable, a specific provision of 50% may be required.

Changes in Financial Reporting Standards

The act of creating general provisions has been declining since revisions in International Financial Reporting Standards (IFRS). International Accounting Standards (IAS) 39 prohibits creating general provisions based on past experience, due to the subjectivity involved in creating the estimates. The reporting entity is required to carry out impairment review for determining the recoverability of the receivables and any associated provisions.


Further Reading


The effect of corporate taxation on bank transparency: Evidence from loan loss provisions
www.sciencedirect.com [PDF]
… 3.2. Measuring loan loss provision deductibility. Countries can allow general loan loss provisions to be tax deductible, restrict tax deductibility to loan loss provisions for specific loans, or not allow provisions to be deductible at all …

Earnings and capital management in alternative loan loss provision regulatory regimesEarnings and capital management in alternative loan loss provision regulatory regimes
www.tandfonline.com [PDF]
… 3.2. Measuring loan loss provision deductibility. Countries can allow general loan loss provisions to be tax deductible, restrict tax deductibility to loan loss provisions for specific loans, or not allow provisions to be deductible at all …

Discretionary accounting and the behavior of Japanese banks under financial duressDiscretionary accounting and the behavior of Japanese banks under financial duress
www.sciencedirect.com [PDF]
… 3.2. Measuring loan loss provision deductibility. Countries can allow general loan loss provisions to be tax deductible, restrict tax deductibility to loan loss provisions for specific loans, or not allow provisions to be deductible at all …

GENERAL REGULATORY FRAMEWORK IN RASTIN PROFIT AND LOSS SHARING BANKING:: PART III-AUXILIARY PROVISIONSGENERAL REGULATORY FRAMEWORK IN RASTIN PROFIT AND LOSS SHARING BANKING:: PART III-AUXILIARY PROVISIONS
ssbrj.org [PDF]
… 3.2. Measuring loan loss provision deductibility. Countries can allow general loan loss provisions to be tax deductible, restrict tax deductibility to loan loss provisions for specific loans, or not allow provisions to be deductible at all …


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