When companies reach the end of their accounting period, they have to determine their result. To obtain it, it is not just a question of subtracting the expenses of the company from the sales made by it. Inventory accounting operations must also be recorded.
Among these inventory operations, the recognition of provisions can have a significant influence on the result for the year. These provisions correspond to undisbursed charges. They, therefore, have no influence on the cash flow but will weigh on the company’s results. Certain specific provisions are governed by taxation; we then speak of regulated provisions.
1. Accounting provisions.
1.1 The constitution of the provision
In accounting, when the company anticipates a future charge but the amount is not known definitively, the company can set up a provision.
Their calculation is governed by the application of the principle of prudence. The accounting rules are in fact based on a set of major principles, the principle of the prudence of which requires that charges be recognized as soon as they are probable.
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A provision is therefore both liability and its counterpart a charge. Its amount is not known with precision, but it is estimated. The whole difficulty lies in appreciating the right amount.
The chart of accounts provides for several subdivisions of accounts depending on the nature of the provision:
- account 151. Provisions for risks,
- account 153. Provisions for pensions and similar obligations,
- account 154. Provisions for restructuring,
- account 155. Provisions for taxes,
- account 156. Provisions for renewal of fixed assets,
- account 157. Provisions for charges to be spread over several years,
- account 158. Other provisions for charges
In return, the recognition of a provision generates a charge that appears:
- to account 681 if it concerns the holding,
- count 686 if it relates to a financial aspect,
- counts 687 if it relates to an exceptional case.
The charge can therefore have an impact at various points in the income statement. In any case, it necessarily influences the result, and therefore the taxable profit.
1.2 Reversal of provisions
However, provisions are not intended to remain in the accounts forever. Once they have become irrelevant, i.e. the fact for which they were created has ended, they should be canceled. In this case, we say that we “take back” the provision. The reversal of a provision can be full or partial.
Once again, the reversal of a provision is a separate income account depending on its character:
- 781 if the provision concerns operations,
- 786 if the provision relates to a financial aspect,
- 787 if the provision relates to an exceptional case.
1.3 The provision: adjustment variable
The recognition or not of provisions is an important issue. Indeed, the assessment of the provision is delicate and the impact on the result undeniable. Who told the lowest result, said reduced tax base and tax mastered. In this sense, the ‘ tax administration is still vigilant on the assessment of provisions.
Note also that the reverse is true, a company can sometimes seek to reduce its provisions to make a profit and reassure investors about the risks it faces.
We must therefore find the right balance and not try to underestimate or overestimate the provision.
2. Regulated provisions: why? How? ‘Or’ What?
2.1 The general principle
Regulated provisions are defined by the General Tax Code; this is why they are qualified as regulated. Unlike the other provisions, they are strictly defined and only concern certain cases.
This is tax assistance intended for certain businesses. In fact, as we have seen, the recognition of provisions entails the recognition of an expense and therefore influences the company’s income.
Like “classic” provisions, regulated provisions must also be canceled when they no longer have any purpose. In this case, the provision is reversed via a product account (78.) which increases the result. The tax savings are therefore very temporary.
Among the regulated provisions, we find:
2.2 The provision for price increases
The use of this provision allows companies having suffered an increase of + 10% in the price of their raw materials, to deduct the additional share of their taxable results. The provision cannot remain for more than 6 years after the end of the financial year during which the provision was made. It must therefore be resumed.
To recognize a provision for price escalation, it is necessary to
- debit account 6873 “Allocations to regulated provisions (stocks)”,
- credit account 143 “Regulated provisions relating to stocks”.
2.3 The provision for non-conforming depreciation
This type of provision aims to encourage investment in companies. In practice, it allows them to depreciate more in the first years, that is to say, to increase the expense linked to the investment. The provision is then reversed as the amortization progresses. We also speak of “over-damping”. As such, the Macron Law included specific over-amortization measures to encourage business investment.
To record a provision for exceptional depreciation, it is necessary
- to debit account 68725 “Allocations to regulated provisions (derogatory depreciation)”,
- to credit account 145 “Special depreciation”.
2.4 The provision for installation loans to former employees
Less common, it is still appropriate to cite this provision. This type of arrangement allows a company to invest in the capital of a company created by a former employee or to grant him a loan at a preferential rate.
To record this type of provision, it is necessary:
- Account 6874 “Allocations to other regulated provisions” is debited,
- And account 144 is credited “Regulated provisions relating to other assets”.
The determination of provisions is therefore a stake for companies given the influence of these on the accounting result of the company. They are also a tax incentive tool to encourage certain practices through temporary tax relief.
Conclusion
Provisions are therefore charges that affect the income statement. It is tempting to use them for the purpose of optimizing taxable profit. It is for this reason that there are accounting rules, and as such, the tax administration is attentive to the misuse of provisions.
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