This free, guided checker walks your finance team through the key decision points for IAS 37 Onerous Contract Provision. Answer a few questions to see the likely treatment and the evidence to document.
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This tool is a high-level IFRS screening aid for general information only and is not accounting, audit or legal advice. Conclusions require entity-specific evidence and judgement - confirm the treatment with your advisor.
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Onerous contract provisions under IAS 37.66-67 apply only to executory contracts - those the entity has not yet fully performed. Test whether the entity still owes future performance at the reporting date; if performance is complete, route warranty, refund, or litigation exposure to the relevant provision or contingent liability analysis. A common error is treating a fully delivered but disputed contract as onerous.
Onerous contract requirements in IAS 37.66-67 apply only to executory contracts; assess remaining exposure under the relevant provision or contingent liability guidance (IAS 37.14; IAS 37.27).
Official guidance: IFRS issued standards
IAS 37.68 defines an onerous contract as one where the unavoidable costs of meeting the obligations exceed the economic benefits expected to be received. Build the benefit side (contract revenue and other inflows) and compare it to the unavoidable cost side, recognising any asset impairment under IAS 36 first per IAS 37.69. A common misapplication is comparing total contract cost rather than the least net cost of exiting.
Expected benefits equal or exceed unavoidable costs; the contract is not onerous and no provision is recognised (IAS 37.68).
Official guidance: IFRS issued standards
IAS 37.68 measures the unavoidable cost as the least net cost of exiting the contract: the lower of the cost of fulfilling it and any compensation or penalties from failure to fulfil. Compute both legs and select the lower. A frequent error is defaulting to fulfilment cost without pricing the termination or penalty alternative, which can be cheaper.
Complete the least-net-cost comparison of fulfilment cost versus exit penalties before recognising the provision (IAS 37.68).
Official guidance: IFRS issued standards
The cost of fulfilling a contract comprises the incremental costs of that contract plus an allocation of other costs that relate directly to fulfilling it (IAS 37.68A). Strip out unallocated general overhead and any provision for future operating losses, which IAS 37.63 prohibits. The common trap is loading the calculation with corporate overhead that would be incurred regardless of the contract.
Remove general overhead and future operating losses; only incremental and directly attributable fulfilment costs belong in the measurement (IAS 37.68A; IAS 37.63).
Official guidance: IFRS issued standards
IAS 37.66 recognises a provision for the present obligation under an onerous contract; establishing the unit of account - whole contract versus a distinct loss-making component - determines what the provision covers. Align the unit of account with how the contract is priced and performed. Provisioning a profitable contract as a whole, or ignoring a loss-making segment, are both errors.
Fix the unit of account - whole contract or distinct component - before measuring the provision under IAS 37.66.
Official guidance: IFRS issued standards
A provision is recognised only when a reliable estimate of the obligation can be made (IAS 37.14(c)), measured at the best estimate of the settlement expenditure (IAS 37.36). Use expected value for a large population of similar contracts and the most likely outcome for a single significant contract (IAS 37.39-40). Where no reliable estimate is possible, disclose a contingent liability rather than recognise a provision.
Obtain contract economics and legal analysis to reach a reliable estimate; absent one, disclose a contingent liability rather than recognise a provision (IAS 37.14; IAS 37.26).
Official guidance: IFRS issued standards
A restructuring provision is recognised only when the general recognition criteria and the specific conditions in IAS 37.72 (a detailed formal plan plus a valid expectation created) are met, and may include only the direct expenditures arising from the restructuring (IAS 37.80). Keep termination and closure costs in a distinct restructuring provision rather than folding them into onerous contract cost. Mixing the two overstates the onerous provision and bypasses the constructive-obligation test.
Assess restructuring costs under IAS 37.71-83 as a separate provision rather than within the onerous contract measurement (IAS 37.71; IAS 37.80).
Official guidance: IFRS issued standards
IAS 37.45 requires the provision to be the present value of the expenditures expected to settle the obligation where the effect of discounting is material. The rate is a pre-tax rate reflecting current market assessments of the time value of money and the risks specific to the liability, with those risks not double-counted in the cash flows (IAS 37.47). Long-dated onerous contracts usually require discounting; ignoring it overstates the provision.
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Official guidance: IFRS issued standards
IAS 37.59 requires provisions to be reviewed at the end of each reporting period and adjusted to reflect the current best estimate, and reversed when an outflow is no longer probable. Link the reassessment to contract modification logs, cost variance reports, and penalty renegotiations. The common failing is a set-and-forget provision that ignores improving or deteriorating contract economics.
Establish a reporting-date reassessment control so the provision reflects the current best estimate (IAS 37.59).
Official guidance: IFRS issued standards
IAS 37.85 requires, for each class of provision, a brief description of the nature and expected timing of outflows plus an indication of the uncertainties, and IAS 37.84 requires a reconciliation of the carrying amount. IAS 37.87 permits aggregation only where provisions are sufficiently similar. Present material onerous contracts as their own class rather than merging them with dissimilar provisions.
Break out the onerous contract class in the provisions note with nature, timing, uncertainties, and a movement reconciliation (IAS 37.84; IAS 37.85; IAS 37.87).
Official guidance: IFRS issued standards
Finalise recognition, measurement, and expense classification, then complete the class-level provision disclosures in IAS 37.84-85. Recognition follows IAS 37.66 at the best estimate of unavoidable costs, after recognising any related asset impairment under IAS 37.69 and IAS 36; a subsequent improvement in contract economics is reflected as a reduction or reversal under IAS 37.59.
Recognise the onerous contract provision at the best estimate of unavoidable costs, after recognising asset impairment under IAS 36 (IAS 37.66; IAS 37.69). Reverse or reduce the provision through profit or loss as the contract is no longer onerous (IAS 37.59).
Official guidance: IFRS issued standards
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