What often needs to be assessed is whether certain possible outflows need to be recognized as expense. We have already covered the period in which a certain expense is recognized, but what comes into the equation, is the possibility of this not being an expense later on. We know the period, but since we are not sure of this expense really happening, does it have to be recognized?

In the accounting they are called as ‘provisions’. You ‘provide’ for certain expenses that relate to events, which already took place, but you know that they may not be needed. It’s the likelihood that needs to be assessed here. It has to be more than likely that some resources need to be given up. This ‘more than likely’ is really difficult to assess. Some wiseasses thought that the ‘more than 50% of chance’ clarification made this assessment easier, when it really doesn’t change a thing. So it’s all about you, what does your inner feeling tell you. It’s your gut feeling that plays a big role in here.

The gut feeling may be supported by previous experiences with this certain third party, this certain situation or opinions of experts. The last one is applicable for an example in court cases, where the lawyers have more insight to current situations than you as a manager or accountant may possess. If you know that your client is going to ask for some compensation because he has done so in the past, he is more than likely to do it this time. Similarly, if for an example certain type of building contracts have made you losses over the years, this is more than likely to cause you some expense.

So to answer the question raised this expense is recognized, if you have more reason to believe that you need to pay something than that you don’t have to pay anything. This is an estimate, so there’s hardly a right or wrong answer.