Provisions are recorded as liabilities of the company that are uncertain either as to their existence or as to their amount. By forming provisions you can avoid your company paying tax on profits that have not actually arisen. By their very nature, provisions offer greater scope for judgement and can therefore also be used to purposefully manage the tax result. For companies that prepare statutory accounts, provisions are consequently among the most important balance sheet items of all.
Examples
- A company has been sued for damages for patent infringement. It is uncertain in principle whether the case will be won or lost.
- A company is expecting to receive a service charge statement from the landlord for the concluded financial year. The amount, however, is unknown.
Counterclaims must be taken into account as a reduction when calculating provisions.
Example: A construction company is being held liable for construction defects but can seek recourse against the responsible subcontractors.
Provisions therefore serve the purpose of recording expenditure in the period to which it relates.
The basis for the balance sheet entry is always the commercial balance sheet (Handelsbilanz). However, not all provisions that are permitted or required under commercial law are also allowable for tax purposes. There are also differences between commercial law and tax law requirements in terms of the calculation method.
Long-term provisions (> 1 year) are discounted and recognised only at their present value (Barwert).
Below you will find an overview of the most commonly formed provisions. Feel free to review your annual accounts for completeness. Can or must further provisions be formed?
Checklist
- Decommissioning obligations
- Severance payments to departing employees
- Waste removal
- Part-time pre-retirement arrangements (Altersteilzeit)
- Contaminated site remediation
- Archiving
- Retention of business records
- Supervisory board remuneration
- Compensation claims by commercial agents
- Outstanding invoices
- Subsidies
- Chamber of Commerce and Industry / Chamber of Crafts contributions
- Employers' liability insurance association (Berufsgenossenschaft) contributions
- Tax audit costs
- Bonus obligations
- Bookkeeping work
- Guarantee assumption obligations
- Foreign exchange forward and options transactions
- Anticipated loss provision (Drohverlustruckstellung)
- Warranty obligations
- Profit-sharing commitments, bonuses, directors' fees (Tantiemen)
- Liability obligations, in particular product liability risks
- General meeting
- Deferred maintenance
- Annual accounts costs
- Anniversary expenditure
- Group liability
- Goodwill services
- Maternity protection
- After-care services
- Publication / filing in the Federal Gazette (Bundesanzeiger)
- Patent and trade mark infringements
- Pension Protection Fund (Pensionssicherungsverein) contributions
- Litigation, legal and criminal defence costs
- Audit costs
- Land recultivation costs
- Pension obligations / pension provision
- Damages obligations
- Safety inspection
- Social plans
- Taxes
- Closure
- Directors' fees (Tantiemen)
- Overtime
- Environmental liability
- Holiday obligations
- Loss absorption
- Christmas bonus