Differentiate between Provisions and Contingent Liabilities

(a) The distinction between Provision and Contingent Liability is as follows: Provision Contingent liability (1) Provision is a present liability of uncertain amount, which can be measured reliably by using a substantial degree of estimation. A Contingent liability is a possible obligation that may or may not crystallise depending on the occurrence or non-occurrence of one or more uncertain future events. (2) A provision meets the recognition criteria. A contingent liability fails to meet the same. (3) Provision is recognised when (a) an enterprise has a present obligation arising from past events; an outflow of resources embodying economic benefits is probable, and (b) a reliable estimate can be made of the amount of the obligation. Contingent liability includes present obligations that do not meet the recognition criteria because either it is not probable that settlement of those obligations will require outflow of economic benefits, or the amount cannot be reliably estimated. (4) If the management estimates that it is probable that the settlement of an obligation will result in outflow of economic benefits, it recognises a provision in the balance sheet. If the management estimates, that it is less likely that any economic benefit will outflow the firm to settle the obligation, it discloses the obligation as a contingent liability.