PROVISION
12 May 2016 By PDSNETAn item on the balance sheet that falls under liabilities. A provision is "raised" when the company has an expense or potential expense for which it has not yet received an invoice and therefore does not know the amount. The provision is an estimate, which is charged against profits because the expense was incurred in the accounting period, which is being reported. It is carried on the balance sheet as a liability. For example, following the COVID-19 pandemic, insurance companies and commercial banks increased their provisions for life insurance claims and loan defaults respectively. Now that the pandemic has been controlled those provisions have mostly been reversed, particularly in the commercial banks. In its financials for the six months to 31st December 2021, Momentum Metropolitan Holdings (Mommet or MTM) said the following, "An additional provision against possible Covid-19 related adverse experience. Mortality data from the South African Medical Research Council, indicates that recorded Covid-19 deaths are understating the full mortality impact of the pandemic. In line with the SAMRC data, our mortality claims experience to date has been more severe than our initial modelling. We therefore increased our Covid-19 provision by an additional R655 million (net of tax)". On 13th March 2023, Transaction Capital (TCP) published a trading statement in which it said that it would make a headline loss per share due to the need to increase its provision for bad debts in SA Taxi as a result of defaults on taxis which it had financed (see also article TCP - Provision for Bad Debt). As a private investor it is very important to understand the impact of provisions and the reversal of provisions on a company's financial statements.
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