Policy for (creating and dissolving) provisions in business entities
Provision policy is defined by national standards and regulations. Accounting principles, estimation principles, as well as those for creating and dissolving provisions, are all outlined in accounting statutes. The reserve policy of an entity depends in large part on the objectives of management. If the goal is to lead the business into bankruptcy or to buy shares from employees, then this could be done by a decrease in the value of assets, through the creation of large provisions, including silent provisions. This is related to the lowering of the financial result of the business. If the goal of management is to strengthen the position of the business and attract investors, then this is done by lowering costs, including those from disclosed provisions and dissolving disclosed provisions. However, if the objective is to decrease tax obligations, then they will be formed above all from provisions set aside for tax liabilities.
The management (creating provision policy) must not forget about accounting principles, which call for the presentation of a true record and reliable picture of the state of affairs. The financial result must take into consideration all probable costs, provisions and only reliable income. Management must not forget that provisions must also protect the entity against negative effects of risk, including economic risk.
Those receiving the financial report must be aware of certain activities by ownership on the financial record, which do not always indicate the effectiveness of the entity. Creative accounting (in the area of provisions as well) is advantageous and positive as long as it does not violate principles, falsify information and misinform investors.