A provision is a liability of uncertain timing or amount.

HGB does not provide a single, explicit definition of a provision in the same way IAS 37 does. Instead, the concept of provisions (“Rückstellungen”) is derived from the recognition requirements in § 249 HGB and the general principles in § 246 and § 252 HGB.

A provision shall be recognised when:

1. an entity has a present obligation (legal or constructive) as a result of a past event;
2. it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation; and
3. a reliable estimate can be made of the amount of the obligation.

In rare cases it is not clear whether there is a present obligation. In these cases, a past event is deemed to give rise to a present obligation if, taking account of all available evidence, it is more likely than not that a present obligation exists at the end of the reporting period.

HGB § 249 states the following in respect of Provisions:

Provisions are to be formed for uncertain liabilities and for anticipated losses on pending transactions. Furthermore, provisions are to be formed for:

1. Expenditures for maintenance and repairs not performed in the financial year, insofar as they will be incurred retroactively within the first three months of the subsequent financial year, or expenditures for the removal of overburden that will be incurred retroactively in the subsequent financial year,
2. warranty services provided without a legal obligation.

A past event that leads to a present obligation is called an obligating event. For an event to be an obligating event, it is necessary that the entity has no realistic alternative to settling the obligation created by the event. This is the case only:

1. where the settlement of the obligation can be enforced by law; or
2. in the case of a constructive obligation, where the event (which may be an action of the entity) creates valid expectations in other parties that the entity will discharge the obligation.

No provision is recognised for costs that need to be incurred to operate in the future.

An outflow of resources or other event is regarded as probable if the event is more likely than not to occur.

If an entity has a contract that is onerous, the present obligation under the contract shall be recognised and measured as a provision.

Provisions may not be formed for other purposes than those set out above.

Provisions may be reversed only insofar as the reason for which they were formed has ceased to exist.

The prudence principle in HGB § 252 further states that valuations are to be performed conservatively; namely, all foreseeable risks and losses that have arisen as per the balance sheet date are to be taken into account even if they have become known only in the period between the balance sheet date and the date on which the annual financial statements were drawn up.

A contingent liability is:

1. a possible obligation that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity; or
2. a present obligation that arises from past events but is not recognised because:
   
   1. it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation; or
   2. the amount of the obligation cannot be measured with sufficient reliability.

An entity shall not recognise a contingent liability. A contingent liability is disclosed, unless the possibility of an outflow of resources embodying economic benefits is remote.

HGB § 251 deals with contingent liabilities and commitments and states the following:

Unless they are to be shown under liabilities, the following are to be reported at the foot of the balance sheet: liabilities arising from the issue and transfer of bills of exchange; liabilities arising from sureties, bill guarantees and cheque guarantees; and liabilities arising from warranty agreements, as well as contingent liabilities and commitments arising from the provision of collateral for third-party liabilities; they may be stated in one single amount.

Contingent liabilities and commitments are to be stated also in those cases in which they are counterbalanced by equivalent claims under a right of recourse.

The amount recognised as a provision shall be the best estimate of the expenditure required to settle the present obligation at the end of the reporting period.

Where the effect of the time value of money is material, the amount of a provision shall be the present value of the expenditures expected to be required to settle the obligation.

The discount rate (or rates) shall be a pre-tax rate (or rates) that reflect(s) current market assessments of the time value of money and the risks specific to the liability. The discount

HGB § 253 deals with the measurement of provisions:

Provisions are to be recognised at the amount that, when assessed exercising reasonable business judgment, will be necessary to settle the liability.

Provisions having a remaining term of more than one year are to be discounted at the market interest rate corresponding to their remaining term, averaged over the preceding ten financial years in the case of provisions formed for old-age pension scheme obligations, and averaged over the preceding seven financial years in the case of provisions formed for other purposes.

rate(s) shall not reflect risks for which future cash flow estimates have been adjusted.

Provisions shall be reviewed at the end of each reporting period and adjusted to reflect the current best estimate. If it is no longer probable that an outflow of resources embodying economic benefits will be required to settle the obligation, the provision shall be reversed.

Where discounting is used, the carrying amount of a provision increases in each period to reflect the passage of time. This increase is recognised as borrowing cost.

Deutsche Bundesbank defines the discounting rate to be applied pursuant to sentences 1 and 2, subject to the stipulations of a statutory instrument, and discloses it at monthly intervals.