Provisions for future costs

Provisions for future costs must be calculated net of anticipated future benefits;
thus a provision for future rental costs of a building no longer required should
be made for the remainder of the lease net of the likely sub-rental income.

Provisions for obligations other than payment and/or for obligations of
uncertain incidence or extent – such as is the case with warranty provisions –
should assume the actual incidence as being in accordance with past experience
and should be based upon the anticipated direct costs together with an uplift for
the indirect costs.

Newly formed businesses or those without an adequate cost
accounting system will therefore have difficulty showing that their warranty
provisions conform to the tax rules.