The following quote is taken from an article (by L. Bernstein) scrutinizing use of reserves to recognize future costs and losses.

The growing use of reserves for future costs and losses impairs the significance of peri- odically reported income and should be viewed with skepticism by the analyst of financial statements. That is especially true when the reserves are established in years of heavy losses, when they are established in an arbitrary amount designed to offset an extraordinary gain, or when they otherwise appear to have as their main purpose the relieving of future income or expenses properly chargeable to it. The basic justification in accounting for the recognition of future losses stems from the doctrine of conser- vatism that, according to one popular application, means that one should anticipate no gains, but take all the losses one can clearly see as already incurred.

c. Cite examples of such reservesyou can draw on those in the chapter. (cite two examples, one from the textbook and one from a review of business magazines.)

Financial-Statement-Analysis-11th-Edition