# Write-back of Provisions No Longer Required: Prior Period or Extraordinary?

When a provision created in earlier years becomes no longer required (e.g., the underlying asset is destroyed/disposed of), accountants are often tempted to call it a 'prior period item' because the provision was originally created in past periods. This is wrong.

## The Principle

A prior period item under AS 5 arises only from:

Errors in the preparation of financial statements of one or more prior periods, OR
Omissions in the preparation of financial statements of one or more prior periods

### When write-back is NOT a prior period item

If the provision was correctly created based on the information and circumstances available at the time, and is later written back because the underlying need has ceased, there is no error in the past financial statements. The original accounting was correct.

Therefore: The write-back is NOT a prior period item.

### What is it then?

If the write-back is:

Not an ordinary recurring feature of the business, AND
Arises from an event clearly distinct from ordinary activities, AND
Is not expected to recur frequently

→ It is an EXTRAORDINARY ITEM under AS 5.

## Disclosure Requirement (Para 8 of AS 5)

The amount written back (if material) should be disclosed as an extraordinary item in the Statement of Profit and Loss so that its impact on current profit or loss can be separately perceived by users.

## Key Reasoning Framework

```

Is the past financial statement WRONG (error/omission)?

YES → Prior Period Item

NO → Not a prior period item

↓

Is the event distinct from ordinary business & non-recurring?

YES → Extraordinary Item (separate disclosure if material)

NO → Ordinary activity (disclose separately if material)

```

Worked example

### Example 1

Question (RTP Jan'25): A company operating helicopters lost four helicopters in crashes over the last three years. The accountant feels that the maintenance provision created earlier for these helicopters is no longer required (since the helicopters no longer exist) and proposes to write it back to the P&L as a prior period item. Is this treatment correct?

Solution:

Step 1 — Test for prior period item:

Was there an error or omission in the preparation of past financial statements when the maintenance provisions were created?

NO. The provisions were correctly created based on the helicopters being in operation. There was no error.

Conclusion: The write-back is NOT a prior period item. The accountant's proposed treatment is incorrect.

Step 2 — Correct classification:

The helicopter crashes (causing the provision to become surplus) are:

Distinct from ordinary business of operating helicopters, AND
Not a regular/recurring feature

Conclusion: The write-back qualifies as an EXTRAORDINARY ITEM under AS 5.

Step 3 — Disclosure (Para 8 AS 5):

The amount written back (if material) should be disclosed as an extraordinary item in the Statement of P&L, separately showing its nature and amount, so that the impact on current period profit/loss is clearly perceivable.

Journal entry (illustrative):

```

Maintenance Provision A/c Dr.

To Profit and Loss A/c (Extraordinary item)

(Being maintenance provision no longer required due to

loss of helicopters, written back as extraordinary item)

```

⚠️ Common exam mistakes

Treating every write-back of an old provision as a prior period item — the test is whether the past statements contained an error, not whether the provision was created in the past.
Routing the write-back through 'Prior Period adjustment' line — this misleads users into thinking past statements were wrong, when actually past accounting was correct based on then-available facts.
Mixing the write-back into ordinary P&L without separate disclosure — material extraordinary items must be disclosed separately under Para 8 of AS 5 so users can perceive the impact on current profit.
Failing to assess 'distinct from ordinary activities' test — helicopter crashes in a helicopter business may seem industry-related, but they are still distinct from ordinary commercial operations and non-recurring.
Forgetting the materiality consideration — disclosure as extraordinary item is required when the amount is material to user understanding.

Bare-Act text Paragraph 8 (Extraordinary Items); Definitions · AS 5 (Revised) - Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies · click to expand

Paragraph 8 of AS 5: Extraordinary items should be disclosed in the Statement of Profit and Loss as a part of net profit or loss for the period. The nature and the amount of each extraordinary item should be separately disclosed in the Statement of Profit and Loss in a manner that its impact on current profit or loss can be perceived. Definition (AS 5): 'Prior period items' are income or expenses which arise in the current period as a result of errors or omissions in the preparation of the financial statements of one or more prior periods.

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AS 5 - Write-back of Provisions No Longer Required (Prior Period vs Extraordinary)

Worked example

⚠️ Common exam mistakes