Our company operates on budgets and if the budget is not spent during the year, the cash cannot be used in the next year.

We have to refund the cash to our parent company and what’s worse the budget for the same item will decrease in the next year as we have not spent it in the current year.

This situation happened at the end of 20X1. We did not spend all the budgeted cash for our advertising services during 20X1 and therefore, we planned the campaign for 20X2, contracted the advertising agency and made a purchase order in December 20X1.

We made a provision for the services from the advertising agency based on the purchase order in the expenses of 20X1. Is this approach correct?



A provision is a liability of uncertain timing or amount and you can recognize a provision ONLY if there is a present obligation arising from past events for which you will need to spend some economic resources to settle.

The question is: Can you avoid the expenses for the goods or services?

Simply speaking, if there is a legal or constructive obligation to do or make something, then you cannot avoid it and you should make a provision (if the outflow of benefits is probable and measurable) when that obligation was created.

For example, if the government approved the new law asking you to fit smoke filters to your factories by 31 December 20X1 and you haven’t done that yet by that day, you probably have a legal obligation to fit smoke filters or pay a penalty and in this case, you should recognize a provision.

However, expenses for advertising relate to the future conduct of your business and you are not obliged to perform it.

If you make a purchase order, but you do NOT receive any services or goods, then there’s no present obligation, because there is no past event. The event happens when you actually receive the advertising service.

You may argue that the binding purchase order is a past event because when it is not taken, you would have to pay some penalty.

However, you can avoid the penalty by taking the services or goods ordered. The “past event” for recognizing a penalty would be therefore a decision to cancel the order and pay the penalty.

Finally, you cannot recognize an accrual related to the order of advertising services, because the accrual is a liability to pay for goods or services already received – and you have not received any goods or service.

Please see IAS 37.11, IAS 37.10, IAS 37.14 for your reference.