provision
Provision is money a company sets aside now for a cost it expects to pay later, even though it does not know the exact amount or date yet.
In plain English
Why would a company want to look poorer than it actually is right now?
That is the question hiding behind every provision, and the answer is that companies are not trying to look poor, they are trying to be honest about trouble they can already see coming.
Say a Nigerian construction firm just finished a housing estate in Lekki, and three buyers have complained about leaking roofs. The company has not paid a kobo yet, and it does not know the final repair bill, but it knows, with reasonable confidence, that money will leave its account eventually. So it sets aside an estimated amount now, as a provision, rather than pretending the problem does not exist until the invoice lands.
This is different from just owing someone money on a clear bill, where both the amount and the date are settled. A provision lives in that uncomfortable middle ground where you are fairly sure something bad or costly is coming, you just cannot pin it down to the naira. Lawsuits, warranty repairs, expected tax disputes, and staff gratuity payments are classic examples.
In the United Kingdom, a bank expecting regulatory fines over a mis selling scandal will book a provision long before the fine is confirmed, because waiting for certainty would mean misleading everyone reading its accounts today.
For a Nigerian professional in London sending money home, provisions rarely touch daily life directly, but they explain why a company's profit can suddenly shrink on paper even when no cash has moved, because the accountants have decided to be upfront about a storm they can see on the horizon.
A telecoms company in Lagos is being sued by a former distributor for ₦120,000,000. Lawyers think the company will likely lose and probably pay around ₦60,000,000 in settlement. The company records a provision of ₦60,000,000 in its accounts this year, reducing its reported profit, even though no cheque has been written yet.
Questions people ask
Is a provision the same as savings set aside in a bank account?
No. A provision is an accounting entry that reduces reported profit and creates a liability on the balance sheet, it is not necessarily cash sitting somewhere waiting. The company may still need to find the actual cash when the bill falls due.
How does a company decide how much to provide for?
It uses its best estimate based on past experience, legal advice, or expert opinion, then updates that estimate as new information arrives, so the figure can rise or fall in later accounts.
Can a company use provisions to hide profit or manipulate results?
It can be tempted to, by overstating provisions in good years to smooth out bad years later, which is why auditors and standards like IFRS scrutinise provisions closely rather than taking management's estimate on trust.
Last reviewed