estimating and accounting for uncertainty

Annals of the „Constantin Brâncuşi” University of Târgu Jiu, Economy Series, Issue 5/2019

„ACADEMICA BRÂNCUŞI” PUBLISHER, ISSN 2344 – 3685/ISSN-L 1844 - 7007

ESTIMATING AND ACCOUNTING FOR UNCERTAINTY

BRAGĂ FILOFTEIA VIORICA

PhD associate professor Spiru Haret University, Bucuresti, Romania

[email protected]

NĂFTĂNĂILĂ ALINA CRISTINA

Lecturer PhD Spiru Haret University, Bucuresti, Romania [email protected]

SOARE JANINA, PhD, Valahia University, Targoviste, Romania

[email protected]

DARIE CASIANA MARIA, Ms.

Academy of Economic Studies, Bucuresti, Romania

[email protected]

Abstract In this paper we will outline the main aspects by which uncertainty can be reflected in accounting

through provisions for risks and expenses. The management of a company is directly involved in the production of

accounting information. Therefore, they need to be careful, responsible and prudent when presenting accounting data.

In the second part we analysed the prudence in evaluating and reflecting the uncertainty by analysing the types of

provisions for risks and expenses constituted and reflected in the financial statements prepared for 31.12.2018 of 40

companies listed on the AeRO market of BVB whose shares will be traded on the basis of the continuous trading model

starting July 12, 2019.

Keywords: uncertainty, risk, prudence, provisions, accounting,

Classification JEL: M41

Introduction

The economic activity is carried out in time and space, both the time and the space are

relatively difficult to control, to control are less transparent. The dimensions of time and space and

the reduced transparency generate risk and give rise to the phenomenon of uncertainty.

The economy knows uncertainty and risk at all levels and every economic agent is subject

to risk and uncertainty. As the economy is more monetary, more fluid, the risk and the uncertainty

become more fluid, more pressing. The current, national and global economy is strongly dominated

by uncertainty and risk.

Uncertainty is a state of uncertainty about the future that is determined by:

a) The unpredictable nature of the economic process.

b) The insufficient knowledge of the economic process.

Incertitude refers to the uncertainty of the results of an action in the economic field.

Uncertainty is all the greater as economic phenomena are dominated by natural processes.

The risk is characterized by the possibility of describing a probability law for the expected

results. This is an uncertain and possible event that can cause damage.

Accounting offers a representation of the reality of business, which is the basis of

managerial decisions and influences the distribution of wealth in society. On the one hand,

accounting professionals must represent the interests of an economic entity, and on the other hand

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they must act in the public interest, offering a climate of trust of the company in the accounting

information and the business environment.

This important role of accounting requires the application of the principle of prudence to

understand the risks in the accounting evaluation and to highlight them as provisions for risks and

expenses. It aims to avoid the risk of transfer in the future periods of present uncertainties likely to

strike the economic entity.

From the definition of the principle of prudence results that its destination is oriented

towards the subsequent evaluation of assets, liabilities, revenues and expenses, but the use of the

principle of prudence in national accounting is very limited. First, when preparing financial reports,

companies do not evaluate the patrimonial elements every time, but only in case of necessity at the

requirements of the foreign investors or at the requirements of the commercial banks. French

author Bernard Colasse [3] formulates two rules that derive from the content of the principle of

prudence:

The diminution of the value of the assets, in relation to the historical costs, since they

appear as probable, they must be counted as provisions for depreciation. The purpose of

recognizing the provisions for depreciation is to restore the entry value of an asset to its

market value or utility. The general rule involves choosing the smallest value between the

present value and the input value; here the provisions are adjustments.

The probable risks generated by the future events likely to generate changes in the value of

the patrimonial elements justify the creation of provisions for risks and expenses.

A provision generally represents a recognized amount in accounting for future expenses that will

be safely or likely to be incurred, but for which there is uncertainty about the amount to be paid

and/or the timing of payment. Future expenses should result from past transactions and events.

1. National and international regulations regarding the provisions for risks and

expenses

The most important aspects regarding the definition, recognition, estimation, updating and use of provisions

are specified by IAS 37 Provisions, contingent liabilities and contingent assets [4], but also in the

Conceptual Framework. In the March 2018 version of the Framework, the Council reintroduced the concept

of prudence in close correlation with neutrality: "neutrality is supported by the exercise of prudence" (point

2.16 IASB, 2018).

In the national legislation, depending on the category of entity we are discussing, aspects related to

provisions will be found both in:

- Order of the Ministry of Public Finance no. 1802 for the approval of the Accounting Regulations

regarding the individual annual financial statements and the consolidated annual financial statements,

as well as in

- Order of the Ministry of Public Finance no. 2844 for the approval of the Accounting Regulations

according to the International Financial Reporting Standards.

Analysing the two regulations for provisions, it can be observed that there is a high degree

of convergence between OMFP 1802/2014 and IFRS (with emphasis on IAS 37). A first difference

between the two sets of regulations can be attributed to the details offered by OMFP 1802/2014

regarding the types of provisions that can be constituted and their description. Regarding the

supplementation / increase of the provisions, IAS 37 provides that the provisions are evaluated

before taxation, because the effects of the taxation on them and the changes that have occurred are

regulated by IAS 12, but not included in the OMFP 1802/2014.

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1.1 The provision is a debt of uncertain value

A provision is a debt with chargeability or uncertainty amount [4].

Based on the definition of the provision, several considerations can be made, as follows [5]:

► Provisions are a sub-class of debt. The liabilities are defined in the General Framework

for the preparation and presentation of the financial statements as current obligations of an entity,

resulting from previous events, whose extinction is expected to determine an outflow of resources

materialized in economic benefits of the entity.

Therefore, it is clear that only the intention without obligation is insufficient to justify a

provision.

An obligatory event is an event that generates a legal or implicit obligation, so that the entity

has no other realistic alternative than to honour the respective obligation.

An implicit obligation is the obligation that results from the actions of an entity if:

a) by establishing a previous practice, the firm's written policy or a sufficiently specific

statement, the entity has indicated to its partners that it assumes certain responsibilities; and

b) As a result, the entity induced the partners the idea that it will honour those

responsibilities.

► Uncertainty is a key feature of a provision. IAS 37 identifies four types of debt:

a) Debts from commercial loans;

The debts that constitute obligations to pay for the goods or services that have been received

from / or provided by the suppliers and which have been invoiced or whose payment has been

officially agreed with the suppliers. These generally have a low risk of uncertainty.

b) Commitments

Payment obligations for goods and services that have been received from suppliers or

provided by them, but which have not yet been paid, invoiced or not, have been officially agreed

on their payment with the supplier. Although it is sometimes necessary to estimate the value or

demand ability of these debts, the uncertainty element is generally much lower than in the case of

provisions. Commitments are often reported as part of debt from trade or other loans, and

provisions are reported separately.

c) Provisions;

They are debts because they are current obligations and it is likely that resource outflows will

be needed that will incorporate economic benefits to discharge the obligations.

d) Contingent debts that are not recognized as debts, because they are either:

• Possible obligations, but for which it must be confirmed if the entity has a current

obligation that can generate a reduction of resources that incorporate economic benefits (for

example, an unresolved process); or

• Current obligations that do not meet the recognition criteria of IAS 37, because either:

- It is not likely to be necessary to reduce the resources of the entity that incorporates

economic benefits to extinguish the obligation; or

- A sufficiently credible estimate of the value of the obligation cannot be made.

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1.2 Categories of provisions: constitution, evaluation and recognition

Provisions are made for items such as:

a) litigation, fines and penalties, damages, claims and other uncertain debts;

b) the expenses related to the service activity during the guarantee period and other expenses

regarding the guarantee granted to the clients;

c) decommissioning of tangible assets and other similar actions related to them;

d) restructuring actions;

e) pensions and similar obligations;

f) taxes;

g) termination of the employment contract;

h) bonuses to be granted to the staff according to the profit realized, according to the legal or

contractual provisions;

i) provisions in connection with concession agreements;

j) provisions for contracts for an onerous title;

k) Other provisions [5].

Next we will present some elements that help to recognize each type of provision.

Provisions for restructuring

Table no. 1 Characteristics of provisions for restructuring

Situations in which they

are constituted

Existence of obligations Costs that are included

in the provision value

Costs that are not

included in the

provision value

- selling or ceasing the

activity of a part of the

business;

- closing of some entities

of the entity;

- changes in the structure

of management, for

example, elimination of a

level of leadership;

-fundamental

reorganizations that have

a significant effect on the

nature and purpose of the

entity's activities.

- is constituted in the case

of the existence of a legal

obligation or implicit

obligations in compliance

with the general

conditions for the

recognition of provisions

and the law.

A provision includes the

direct costs generated by

the restructuring, namely

those which:

- are necessarily

generated by the

restructuring process; and

- They are not related to

the continuous

development of the

entity's activity.

The provision should not

include costs such as

those related to:

- retraining or relocating

permanent staff;

‐ marketing; or

- Investments in new

systems and the

distribution networks.

Pension provisions refer to the amounts that will be paid by the entity after the employees

have left the entity.

Table no. 2 Characteristics of pension provisions

Situations in which

they are constituted

Existence of obligations Amount of the

provision

When are they

recognized?

- After the employees

left the entity.

- When the entity has

stipulated by the

constitutive act or the

employment contract the

obligation to pay certain

amounts as a pension.

- is usually established

by specialists in the field.

In determining them, the

age, the seniority in work

and the turnover of the

personnel within the

entity are taken into

account.

- They are recognized

during the work period

remaining until

retirement. When

establishing these

provisions will take into

account the legislation in

force.

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Provisions for taxes

Table no. 3 Characteristics of provisions for taxes


are constituted

Existence of

obligations

Amount of the provision When are they

recognized?

- is constituted for future

payment amounts due to

the state budget, provided

that the respective amounts

are not reflected as a debt

in relation to the state.

-is determined by the

unfinished control

operations, court

processes, other

situations.

It includes:

- differences in taxes

resulting from unfinished

control operations;

- taxes for which the entity

has open court

proceedings;

- reserves from tax

facilities or other reserves

for which in the tax

legislation there are

provisions regarding their

taxation, as well as in

other situations that may

generate debts in the form

of income tax.

When the mentioned

situations appear.

Provisions for termination of the employment contract

Table no. 4 Characteristics of provisions for termination of the employment contract

Situations in which



provision

When are they

recognized?

- At the end of the

employment contract.

- represent obligations

assumed by the entity in

relation to the

employees, for the

termination of the

employment contract,

for example, obligations

resulting from the

collective labour

contract, to pay an

amount in correlation

with the number of years

worked in the entity.

- An amount established

in correlation with the

number of years worked

in the entity.

- These provisions are

recognized when there is

certainty of their payment

within a foreseeable

period of time.

Provisions in connection with concession agreements

Table no.5 Characteristics of provisions in connection with concession agreements


are constituted


provision

When are they

recognized?

- if the operator of a

service concession

agreement has a

contractual obligation to

maintain the

- is determined by the

contractual obligation to

maintain the

infrastructure at a certain

stability level.

- represents the best

estimate of the

expenditure that would

be needed to settle the

current obligation at the

- At the balance sheet

date.

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are constituted


provision

When are they

recognized?

infrastructure at a certain

level of use or to bring

the infrastructure in a

certain state before being

handed over to the

grantor at the end of the

service agreement, as

obligations to be fulfilled

as a condition of the

primate license.

balance sheet date.

Provisions for the decommissioning of tangible fixed assets, represents the existing debts

from the decommissioning, restoration or of a similar nature are recognized as part of the cost of an

item of tangible fixed assets.

Table no. 6 Characteristics of provisions for the decommissioning of tangible fixed assets

Situations in which


Existence of obligations Amount of the provision When are they

recognized?

- The purchase or

production of tangible

assets.

- When there is an

obligation to demolish,

remove and restore

elements of tangible

assets.

-includes the costs of

demolition and removal of the

tangible fixed assets and of

the restoration of the area in

which it was located is an

obligation for which an entity

bears expenses either at the

time of the acquisition of the

tangible fixed assets or as a

consequence of the fact that it

used it for a certain period of

time.

- When determining

the initial value for

the tangible assets.

Provisions for contracts with an onerous title

Table no. 7 Characteristics of provisions for contracts with an onerous title

Situations in which



provision

When are they

recognized?

- The entity has a

contract with an onerous

title.

- the current contractual

obligation is stipulated in

the contract

- is determined by the

inevitable costs

- If certain events turn

such a contract into an

onerous one.

An onerous contract is a contract in which the inevitable costs associated with the

fulfilment of the contractual obligations exceed the expected economic benefits to be obtained from

the contract. The inevitable costs of a contract reflect the net cost of leaving the contract, that is, the

lower value of the cost of contract performance and any compensation or penalties generated by the

non-performance of the contract.

Before constitute a separate provision for onerous contracts, an entity recognizes any

impairment loss on assets allocated to the contract in question.

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Other provisions

Other provisions include provisions made for:

other benefits that the entity is to pay to employees or persons dependent on them, which

are not related to restructuring, pensions, taxes or termination of employment contract;

expenditures related to environmental protection for: air protection; waste water

management; waste management, soil protection, groundwater and surface water;

protecting biodiversity and landscape; other activities for the protection of the

environment;

Joint obligations with a third party, etc.

The provisions included in "Other provisions" should be described in the explanatory notes,

if they are significant.

1.3 Estimation and recognition of provisions

Provisions can be distinguished from other liabilities such as debts from commercial loans

and accounting commitments because there is uncertainty about the timing or amount of future

expenditure required to settle them.

IAS 37 Provisions, contingent liabilities and contingent assets, but also OMFP 1802

presents the conditions under which a provision can be recognized as follows:

“A provision must be recognized if:

(a) an entity has a current obligation (legal or implied) arising from a previous event;

(b) an outflow of resources incorporating economic benefits is likely to be required to settle the

obligation; and

(c) The amount of the obligation can be estimated credibly.

If these conditions are not met, a provision must not be recognized. ”

The question arises at what value should the provision be recognized? Given that it is

going to cover the settlement of a debt, then it must constitute the best estimate of the expenditure

required to settle the current obligation at the balance sheet date. The amount that the entity would

pay, at the balance sheet date, rationally for settling the obligation or transferring it to a third party

is the best estimate.

A basis for this estimation operation is: the reasoning of the management the experience of

similar transactions, and in some cases the reports of independent experts.

Uncertainties regarding the value that will be recognized as a provision are treated by

different means, depending on the circumstances as follows:

- When the provision under evaluation involves a wide range of elements, the statistical

method is used to determine the "expected value". The obligation is estimated by weighting all

possible outcomes according to their probabilities. Therefore, the provision will be different

depending on the probability of losing a certain amount, for example 60% or 90%.

- If there is a continuous range of possible results and the probabilities of each are equal,

the midpoint is used.

- If a single obligation is evaluated, the individual result is most likely to be the best

estimate of the debt. However, even in such a case, the entity is considering other possible

outcomes. If other possible outcomes are, for the most part, either higher or lower than the most

likely outcome, the best estimate will be a greater or lesser sum.

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“To determine the best estimate of a provision, the risks and uncertainties that inevitably

affect many events and circumstances must be taken into account.” Here, the risks determine

variable results, which is why caution should be exercised in estimating the value of provisions so

that income and assets are not overvalued and expenses and liabilities are not undervalued.

1.4 Subsequent evaluation of provisions

Subsequent to initial recognition we must consider:

effect of time-value

If the effect of the time-value of the money is significant, the value of a provision must

represent the present value of the expenses estimated to be necessary for the settlement of the

obligation.

Due to the time value of money, the provisions for cash outflows that intervene shortly after

the balance sheet date are much higher than those for cash outflows that have the same value, but

which intervene later. Therefore, the provisions are updated if the effect is significant.

The update factor (rate) is the pre-tax rate that reflects the market valuation and the risks

associated with the respective type of obligation.

future events

Future events that may affect the amounts required to settle an obligation should be

reflected in the value of a provision if there is sufficient objective evidence that the events in

question will take place.

Examples of future events: future technological discoveries that may affect costs and

legislative changes.

1.5 Reimbursement of expenses necessary to settle a provision

The recognition of the full or partial reimbursement of the expenses necessary for a

provision must be made if it is almost certain that it will receive the reimbursement if it fulfils its

obligation. Reimbursement should be treated as a separate asset. The amount recognized as

reimbursement must not exceed the amount of the provision.

In the statement of income and expenses, the costs of a provision may be presented after

deducting the amount recognized for a reimbursement.

Such a situation is encountered in the case of insurance contracts, compensation clauses or

guarantees offered by the suppliers. The other party may either reimburse the amounts paid by the

entity or pay directly the amounts in question.

In most situations, the entity will remain responsible for the entire amount in question, so

that, if the other party does not pay for any reason, the entity is the one who has to pay the entire

amount. In such situations, the entity recognizes a provision for the full amount of the debt and a

separate asset for the expected repayment, when it is almost certain that it will receive the amount

in question if it fulfils its obligation [4].

1.6 Evaluation on the balance sheet

Provisions must be reviewed at each balance sheet date and adjusted to reflect the best

current estimate. If it is no longer probable that an outflow of resources incorporating economic

benefits will be required to settle the obligation, the provision must be resumed.

If they are updated, the carrying amount of a provision increases in each period to reflect

the passage of time. This increase is recognized as a cost of borrowing.

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1.7 Use of provisions

A provision should be used only for the expenses for which it was initially recognized.

Only expenses related to the initial provision may be covered by the provision. Covering

expenses from a provision that was initially recognized for another purpose would hide the impact

of two different events.

2. Analysis of the way of reflecting the uncertainty in the case of the companies listed

on the BSE

In order to outline by figures how to reflect the uncertainties in accounting, we analysed the

types of provisions for risks and expenses established and reflected in the financial statements

prepared for 31.12.2018, in this case, in the explanatory notes of 40 companies listed on the AeRO

market. BSEs whose shares will be traded on the basis of the trading model continue from July 12,

2019.

The conformity of the information presentations regarding the provisions with the

publication requirements was analysed based on the accounting regulations applicable to the

analysed entities that is OMFP 1802 for the approval of the Accounting Regulations regarding the

individual annual financial statements and the consolidated annual financial statements.

Table no. 8 List of companies listed on the AeRO market of BVB whose shares will be

traded on the basis of the continuous trading model or the auction model from July 12

No. Symbol CAEN code No. Symbol CAEN code

1 AMY 1062 Manufacture of starch and

starch products 21 MOIB 1061Manufacture of milling products

2 ASC

6201 Activities to achieve custom

software (customer-oriented

software)

22 MORA 1061Manufacture of milling products

3 AVIO 3030 Manufacture of aircraft and

spacecraft 23 NCHI

4110 Real estate development

(promotion)

4 BNET

4652 Wholesale of electronic and

telecommunications components

and equipment

24 PRIB 6820 Renting and leasing of own or

rented real estate

5 BRCR 1414 Manufacture of underwear 25 PRSN 7112 Engineering activities and

technical consultancy related to them

6 BRNA 5040 Transportation of goods by

inland waterways 26 PTRC

1712 Manufacture of paper and

cardboard

7 BUCU

4719 Retail trade in non-specialized

stores, with predominant sale of

non-food products

27 RCHI 5510 Hotels and other similar

accommodation facilities

8 BUCV 4639 Non-specialized wholesale of

food, beverages and tobacco 28 REFE 3020 Manufacture of rolling stock

9 CACU 4619 Brokers in the trade with

various products 29 REGL 5610 Restaurants

10 CEPO

7219 Research and development in

other natural sciences and

engineering

30 RETZ 5621 Catering for events

11 ELV 3109 Manufacture of furniture n.c.a. 31 SCDM 6820 Renting and leasing of own or

rented real estate

12 ELZY 4619 Brokers in the trade with

various products 32 SEVE

3011 Ship construction and floating

structures

13 FOJE

910 Service activities annexed to the

extraction of crude oil and natural

gas

33 SINA 1320 Production of soft goods

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No. Symbol CAEN code No. Symbol CAEN code

14 GAOY 6820 Renting and leasing of own or

rented real estate 34 STNM

8299 Other activities of support

services for enterprises n.c.a.

15 IPRU

2732 Manufacture of other electrical

and household electrical wires and

cables

35 TSLA 6491 Financial leasing

16 LIH

6201 Activities to achieve custom

software (customer-oriented

software)

36 TUAA 5510 Hotels and other similar

accommodation facilities

17 MACO

2332 Manufacture of bricks, tiles

and other construction products,

from burnt clay

37 UARG 1041 Manufacture of oils and fats

18 METY

2829 Manufacture of other general

purpose machinery and equipment

n.c.a.

38 UNIT 6820 Renting and leasing of own or

rented real estate

19 MOBT 3109 Manufacture of furniture n.c.a. 39 UZC 2899 Manufacture of other specific

machinery and equipment n.c.a.

20 MODY

4711 Retail sale in non-specialized

stores selling predominantly food

beverages and tobacco

40 VAZ 1101 Distillation, refining and mixing

of alcoholic beverages

Source: http://www.bvb.ro/info/Anunturi/Anunt_model_licitatie_AeRO.pdf

Of the 40 companies analysed, 21 constituted provisions for risks and expenses in the years

2017-2018, in the amount of 56,946,209 lei respectively 39,481,206 lei, this number being largely

influenced by the fact that of all the provisions that the accounting regulations identifies them as

possible only the provisions covering the expenses related to the service activity during the

guarantee period and other expenses regarding the guarantee granted to the clients are deductible

expenses when calculating the corporate tax.

Table no. 9 List of companies that have provisions for risks and expenses in the balance at

the end of 2017, 2018. -lei-

Symbol of

society 2017 2018

Symbol of

society 2017 2018

BNET 305,472 0,00

RCHI 1,470,268 1,452,431

BRCR 575,337 0,00

REFE 4,103,446 3,237,354

BUCU 265,893 29,082,362

REGL 70,407 359,838

ELZY 1,110,793 146,863

SCDM 43,393,632 259,111

FOJE 6,721 3,385

SEVE 133,370 110,000

GAOY 22,290 1,285,684

TSLA 15,992 502,318

IPRU 2,460,701 340,869

TUAA 156,138 0,00

MACO 26,579 1,607,707

UARG 675,674 627,484

PRSN 525,616 6,722

UNIT 17,063 36,078

PTRC 1,463,954 19,418

UZC 146,863 403,582

Total 56,946,209 39,481,206

Source: own processing based on the financial statements published by BVB

The main types of provisions constituted were:

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provisions for litigation, fines and penalties, damages, claims and other uncertain debts;

provisions for taxes,

provisions for employee benefits

provisions regarding the expenses related to the service activity during the guarantee period

and other expenses regarding the guarantee granted to the clients

provisions for rest holidays

other provisions

Table no. 10 The share of the types of provisions for risks and expenses established in the

years 2017/2018

Type of provision for risks and expenses 2017

(%)

2018

(%)

provisions for litigation, fines and penalties,

damages, claims and other uncertain debts; 83.70 74.03

provisions for taxes 3.19 4.13

provisions for employee benefits 4.48 2.21

provisions regarding the expenses related to the

service activity during the guarantee period and

other expenses regarding the guarantee granted

to the clients 3.69 1.31

provisions for rest holidays 0.73 1.39

other provisions 4.20 16.93 Source: own processing based on the financial statements published by BVB

Table no. 11 List of companies that have established provisions for litigation

-lei-

No. Symbol of society 2017 2018

1 BNET 30,472 0

2 BUCU 109,456

3 PRSN 525,616

4 REFE 3,183,716 1,124,162

5 SCDM 43,393,632 27,958,200

6 UZC 146,863 146,863

Total

47,664,755 29,229,225


Table no. 12 List of companies that made up other provisions

-Lei-

No. Symbol of society 2017 2018

1 BRCR 571,713 0

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2 ELZY 1,110,793 1,607,707

3 FOJE 6,721 6,722

4 MACO 26,579 19,418

5 RCHI 1,097,615

6 REFE 212,830 212,830

7 REGL 70,407 141,986

8 SCDM 2,807,236

9 TSLA 15,992 20,126

10 UARG 359,975 409,992

11 UNIT 17,063

12 UZC 359,838

Total 2,392,073 6,683,470


Analysing the data on the types of provisions for risks and expenses established in the years

2017/2018 by companies listed on the AeRO market of BVB whose shares will be traded on the

basis of the continuous trading model starting with July 12, 2019 we can draw the following

conclusions:

- - companies are reluctant to estimate and record debts with uncertain maturity and value;

- the largest share of the total is held by provisions for litigation, fines and penalties,

damages, claims and other uncertain debts, that is 83.70% in 2017 and 74.03% in 2018

respectively;

- the smallest share of the total is held by the provisions for rest holidays in percentage of

0.73% in 2017, respectively 1.39% in 2018;

We also consider that the use of estimates is an essential component of the preparation of

financial statements and does not reduce their credibility.

Conclusions

Given the uncertainty surrounding the assessment and maturity of provisions, their tax

regime is distinct from the other debt regime. Thus, their tax deductibility is only recognized in the

cases and in the amount expressly provided by law (the provisions for the guarantees granted to the

clients being fully deductible).

Most provisions made during the year are not deductible in that year, but later, when the

amount and the maturity become clear. This fact is interpreted by certain practitioners as being

synonymous with their lack of usefulness. From an accounting point of view, however, the

establishment of provisions is necessary to obtain a real accounting result, which should not be

overvalued, an essential element for avoiding the decapitalization of the company, by distributing

dividends without coverage.

However, provisioning, as a way of reflecting the uncertainties in accounting, contributes to

the faithful representation of the financial position of the entity. Such uncertainties are recognized

by presenting their nature and value, but also by exercising prudence in the preparation of financial

statements. Prudence means finding those accounting estimates, associated with given uncertainty

conditions, that do not overestimate assets and income, and that debts and expenses are not

undervalued. The exercise of prudence should not allow, for example, the formation of hidden

reserves or excessive provisions, the deliberate undervaluation of assets or income, but neither the

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deliberate overvaluation of debts or expenses. This requirement is imperative, as investors base

their economic decisions starting from the analysis of the financial statements, as a true image of

the financial position and the performance of an entity.

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estimating and accounting for uncertainty

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