ACCA Financial Reporting (F7) Practice Exam 2025 – Complete Prep Guide

The principle that applies to the recognition of provisions is that they are recognized when the outflow of resources is probable. This aligns with the framework laid out in accounting standards, such as IAS 37 on Provisions, Contingent Liabilities, and Contingent Assets.

In accounting, a provision is a liability of uncertain timing or amount. The key factor for recognizing a provision is the probability of the future outflow of resources, such as cash, to settle the obligation. If it is deemed likely that resources will be expended in the future to settle the obligation, then a provision should be established in the financial statements to reflect this anticipated financial responsibility.

This principle allows for a more accurate representation of an entity's financial position because it acknowledges potential liabilities that are probable rather than waiting for certainty or specific amounts, thus providing users of the financial statements with a clearer view of the company's obligations.

In contrast to this correct reasoning, the other options present different scenarios or misunderstandings of the recognition criteria for provisions. Recognizing a provision when payment is not expected fails to capture the necessary anticipation of an outflow, recognizing it for all estimated expenses does not account for the probability criterion, and recognizing a provision only when legally binding disregards situations where a