Onerous contract
The unavoidable cost is the lower of the cost of fulfilling the contract and any compensation or penalties for failing to fulfil it. Recognise and measure a provision for the present obligation under IAS 37 after recognising any impairment of assets used in fulfilling the contract. Include costs that relate directly to the contract, including both incremental costs and an allocation of other directly related costs. Future operating losses on their own do not create a provision.
Worked example
An unavoidable sales contract will yield $80,000. Fulfilment costs are $110,000, while cancellation costs $20,000. The least net cost of exiting is $20,000, so the provision is $20,000 before discounting and other relevant adjustments.
Common mistake
Providing for the $30,000 fulfilment loss without considering the lower cancellation cost, or recognising a provision merely for a planned future loss.
Where it appears in your exams
| Qualification | Exam | Relationship | Period |
|---|---|---|---|
| ACCA | FR | Direct | September 2026–June 2027 |
| ACCA | SBR | Direct | September 2026–June 2027 |