Future operating losses and onerous contracts

A business that expects to lose money does not provide for its future losses: they are not a debt, but an indication that some assets may be impaired. By contrast, an onerous contract — whose unavoidable costs exceed the expected benefits — creates a present obligation that is provided for. The contract is onerous when its cost of fulfilling (incremental costs and an allocation of other directly related costs) exceeds the expected benefits; the provision is the least net cost of exiting, the lower of the net cost of fulfilling and the exit penalty. Before any provision, the entity recognises impairment on the assets used to fulfil the contract.

In this lesson

1. 2Understand
2. 3The IFRS rule
3. 4Why?
4. 5How to apply it
5. 6Journal entry
6. 7Key points
7. 8Exercises