Provisions versus contingent liabilities

When preparing the annual financial statements, the question often arises as to whether a provision must be recognised for events or whether the event should be considered a contingent liability.

The following criteria apply cumulatively to provisions:

• it is a past event, i.e. before the balance sheet date and earlier,
• the cash outflow has a probability of occurrence of more than 50% and
• the amount of the cash outflow can be reliably estimated.

Provisions are recognised in the income statement. They are categorised as extraordinary, one-off or prior-period expenses and must be explained in the notes.

Contingent liabilities are legal or constructive obligations for which an outflow of funds appears possible but unlikely, less than 50% probability of occurrence. The amount of the cash outflow cannot be reliably estimated. Contingent liabilities are not recognised and only appear in the notes to the annual report.