Question

During 2011, PT Andalan Sahabat received a very large net profit compared to the previous year's net income. This big profit, because management managed to negotiate the lowest possible purchase price of raw materials, while at that time the selling price of the products produced was high. Management does not want the public to know that for 2014 PT Andalan Sahabat received such a high net profit, because management is worried that customers will ask for lower selling prices. For this reason, management decides to reduce net income by recognizing provisions for expenses that may occur in the coming reporting period.

Requested: Your opinion regarding the recognition of provisions for future expenses, related to the basic framework. Give a detailed explanation of your answer!

Answer 1

Provisions can be recognised on when there is present obligation as result of past events and out flow of Economic benifits is required to selttle the Obligation.

Example of Present obligation : suppose company X has sold A car With 2 years warrenty as on Balalnce sheet date only 1 year has completed still one year is Yet to come. in this case as result of Sale transaction there is present obligation on company X to replace the part if that part does not work. so provision to be created.

Based on the above principle just to reduce the profit creating provision of Future Expenditure is not allowed.