Provisions

Provisions are liabilities of uncertain timing or amount — recognised when a present obligation exists from a past event, an outflow of resources is probable, and the amount can be reliably estimated. They cover litigation risks, product warranties, restructuring costs, environmental obligations and revenue-related accruals. In financial due diligence, provision adequacy is a key earnings quality indicator: under-provisioning inflates reported earnings and assets, while over-provisioning creates reversible hidden reserves. Benchmarking provisions against industry norms and quantifying the adequacy gap is a systematic due diligence step.

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Example: due diligence on a Swiss company identifies CHF 180,000 of under-provisioned litigation risk (70% loss probability on CHF 420,000 of claims = CHF 294,000 required vs CHF 114,000 provisioned) and CHF 120,000 of under-provisioned product warranties. The CHF 234,000 total under-provision is integrated as a downward price adjustment in the SPA, covered by a specific warranty provision requiring the seller to indemnify for these known litigation exposures.

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Hectelion assesses provision adequacy systematically in every due diligence, comparing existing provisions against economic obligations and sector benchmarks.