Accounting for onerous contracts

In November 2017, the IFRS Interpretations Committee (IFRS IC) decided to add a narrow-scope standard-setting project to its agenda, with the objective of clarifying the meaning of the term “unavoidable costs” in the definition of an onerous contract in IAS 37 – Provisions, Contingent Liabilities and Contingent Assets.

Keywords: Mazars, Thailand, IFRS, IASB, IAS 37, IFRS IC, IFRS 15, IFRS 17

18 May 2018

At its March meeting, the Committee continued its discussions on the subject, taking into account the comment letters on the project, and recommended that the IASB should:

  • specify that the “cost of fulfilling” a contract comprises the “costs that relate directly to the contract”;
  • provide examples of costs that do and do not relate directly to a contract; and
  • provide these clarifications as a narrow-scope amendment to IAS 37, rather than as an interpretation or as part of the IFRS annual improvements process.

After considering the comment letters submitted, the staff was of the opinion that the concept of “unavoidable costs” in IAS 37 should be aligned with the “costs incurred in fulfilling a contract” as defined in IFRS 15 – Revenue from Contracts with Customers (and IFRS 17 – Insurance Contracts).

In practice, the Committee’s current stance on onerous contracts is similar to that in the old IAS 11 – Construction Contracts (broadly consistent with the cost of fulfilling a contract in accordance with IFRS 15). It is no longer considering offering entities an accounting policy choice between this approach and an “incremental costs” approach, as it did in its tentative agenda decision published in the June 2017 IFRIC Update.

A summary of the most recent IFRS IC discussions is available at the IFRS website