Onerous contract review

• Contract examined (counterparty, remaining obligations, termination clauses and penalties)

  TextRequired

  NARVELLE_TRAY_SUPPLY_20X3

• Incremental costs still to be incurred to fulfil the contract (direct labour, direct materials)

  Table

  RESIN · DIRECT_MATERIALS · 930,000 | LABOUR · DIRECT_LABOUR · 270,000 | ENERGY · DIRECT_ENERGY · 60,000

• Allocation of other costs that relate directly to fulfilling contracts (share of the depreciation of equipment used, for example)

  Table

  LINE · THERMOFORMING_LINE_DEPRECIATION_SHARE · 75,000 | MOULD · DEDICATED_MOULD_DEPRECIATION · 10,000

  The allocation basis is case data or a case assumption, never imposed by the standard; it is documented in the cost analysis. Share of depreciation determined after any impairment loss on the assets used: case data.

• Compensation or penalties arising from failure to fulfil the contract (exit)

  Number

  1,500,000

  Contract data. If the contract provides for no exit, leave this field blank: there is no exit alternative to compare and the provision is the net cost of fulfilling.

• Economic benefits expected under the contract (consideration still to be received)

  Number

  1,200,000

• Impairment loss determined under IAS 36 on the assets used in fulfilling the contract

  Number

  60,000

  Case data: the impairment test under IAS 36 is performed outside this workpaper.

• Evidence obtained and referenced (category, document reference)

  EvidenceRequired

IAS 37 §3IAS 37IAS 37 §66IAS 37 §67IAS 37 §68

• Points examined

  ChecklistRequired

  • Contract cancellable without paying compensation: no obligation
  • Executory contract that is not onerous: outside the scope
  • Contract with a customer or certain leases that have become onerous: IAS 37 applies
  • Onerous if the cost of fulfilling exceeds the economic benefits expected (positive least net cost of exiting)
  • Least net cost of exiting: the lower of the net cost of fulfilling (cost of fulfilling − expected benefits) and any compensation or penalties arising from failure to fulfil the contract
  • Present obligation under the contract recognised and measured as a provision

IAS 37 §68AIAS 37 §69

• Points examined

  ChecklistRequired

  • Incremental costs of fulfilling the contract (direct labour, direct materials)
  • Allocation of other directly related costs (depreciation of equipment used for this and other contracts)
  • Costs that do not relate directly to the contract: outside the cost of fulfilling it
  • Impairment loss on the assets used in fulfilling the contract recognised before the provision (IAS 36)

• Basis of allocation of the other directly related costs (case data or assumption)

  TextRequired

  MACHINE_HOURS

IAS 37 §63IAS 37 §64IAS 37 §65IAS 37 §66

• Points examined

  ChecklistRequired

  • No provision for future operating losses (neither a liability nor meeting the recognition criteria)
  • Only the present obligation under an onerous contract is provided for, not the expected loss of the operation
  • Expected future losses: indication that assets of the operation may be impaired, tested under IAS 36

IAS 37 §66IAS 37 §68IAS 37 §68A

• Cost of fulfilling the contract (incremental costs + allocation of other directly related costs)

  Calculation

  1,345,000

  Incremental costs still to be incurred to fulfil the contract (direct labour, direct materials) ; Allocation of other costs that relate directly to fulfilling contracts (share of the depreciation of equipment used, for example)

• Net cost of fulfilling (cost of fulfilling − expected benefits, if positive: onerous contract)

  Calculation

  145,000

  Cost of fulfilling the contract (incremental costs + allocation of other directly related costs) ; − Economic benefits expected under the contract (consideration still to be received)

• Excess of expected benefits over the cost of fulfilling (contract not onerous)

  Calculation

  0

  Cost of fulfilling the contract (incremental costs + allocation of other directly related costs) ; − Economic benefits expected under the contract (consideration still to be received)

• Least net cost of exiting (lower of the net cost of fulfilling and the exit penalty)

  CalculationRequired

  145,000

  Net cost of fulfilling (cost of fulfilling − expected benefits, if positive: onerous contract) ; Compensation or penalties arising from failure to fulfil the contract (exit)

  Rule (IAS 37, para. 68; reading adopted in this course): compare the net loss on fulfilling (cost of fulfilling − expected benefits) with the exit penalty, not the gross cost of fulfilling. Example: cost 500, benefits 420, penalty 60 → exit, provision 60; benefits 480 → fulfil, provision 20. Calculated only if the contract provides an exit.

• Saving from exiting (net cost of fulfilling − least net cost of exiting)

  Calculation

  0

  Net cost of fulfilling (cost of fulfilling − expected benefits, if positive: onerous contract) ; − Least net cost of exiting (lower of the net cost of fulfilling and the exit penalty)

• Onerous contract provision (least net cost of exiting)

  CalculationRequired

  145,000

  Net cost of fulfilling (cost of fulfilling − expected benefits, if positive: onerous contract) ; − Saving from exiting (net cost of fulfilling − least net cost of exiting)

• Prior impairment loss on the assets used

  Entry

  Account	Debit	Credit
  Impairment loss	60,000
  Property, plant and equipment		60,000

  Teaching assumption: the assets used in fulfilling the contract are property, plant and equipment; the amount is data from the IAS 36 test.

• Onerous contract provision

  Entry

  Account	Debit	Credit
  Onerous contract expense	145,000
  Provision		145,000

IAS 37 §67IAS 37 §68IAS 37 §68A

• Classification of the contract and least costly route retained

  JudgmentRequired

  Onerous, fulfil: provision = cost of fulfilling − expected benefits (higher penalty or no exit provided)

  Onerous, fulfil: provision = cost of fulfilling − expected benefits (higher penalty or no exit provided) / Onerous, exit: provision = exit penalty (lower than the net cost of fulfilling) / Not onerous: no provision / Cancellable without compensation: no obligation

  Professional judgement: identify the directly related costs and the basis for allocating the other costs; the basis retained is case data or a case assumption.

• Rationale: facts relied on, analysis, alternative rejected

  TextRequired

• Impact by caption, derived from the entries above (the Notes line refers to the disclosures)

  TableRequired

• Paragraphs cited in this workpaper (verification status shown from the register)

  References

• The classification of the contract is documentedPass
• The cost allocation basis is documentedPass
• The onerous contract provision is determinedPass
• The impairment entry is balancedPass
• The provision entry is balancedPass

Assets

-60,000

Liabilities

145,000

Profit or loss

-205,000

OCI

0

Equity

-205,000

• Contract examined (counterparty, remaining obligations, termination clauses and penalties)

  TextRequired

  ILBARO_TRAY_SUPPLY_20X3

• Incremental costs still to be incurred to fulfil the contract (direct labour, direct materials)

  Table

  DIRECT · MATERIALS_LABOUR_ENERGY · 380,000

• Allocation of other costs that relate directly to fulfilling contracts (share of the depreciation of equipment used, for example)

  Table

  LINE · THERMOFORMING_LINE_DEPRECIATION_SHARE · 45,000

  The allocation basis is case data or a case assumption, never imposed by the standard; it is documented in the cost analysis. Share of depreciation determined after any impairment loss on the assets used: case data.

• Compensation or penalties arising from failure to fulfil the contract (exit)

  Number

  Contract data. If the contract provides for no exit, leave this field blank: there is no exit alternative to compare and the provision is the net cost of fulfilling.

• Economic benefits expected under the contract (consideration still to be received)

  Number

  500,000

• Impairment loss determined under IAS 36 on the assets used in fulfilling the contract

  Number

  Case data: the impairment test under IAS 36 is performed outside this workpaper.

• Evidence obtained and referenced (category, document reference)

  EvidenceRequired

IAS 37 §3IAS 37IAS 37 §66IAS 37 §67IAS 37 §68

• Points examined

  ChecklistRequired

  • Contract cancellable without paying compensation: no obligation
  • Executory contract that is not onerous: outside the scope
  • Contract with a customer or certain leases that have become onerous: IAS 37 applies
  • Onerous if the cost of fulfilling exceeds the economic benefits expected (positive least net cost of exiting)
  • Least net cost of exiting: the lower of the net cost of fulfilling (cost of fulfilling − expected benefits) and any compensation or penalties arising from failure to fulfil the contract
  • Present obligation under the contract recognised and measured as a provision

IAS 37 §68AIAS 37 §69

• Points examined

  ChecklistRequired

  • Incremental costs of fulfilling the contract (direct labour, direct materials)
  • Allocation of other directly related costs (depreciation of equipment used for this and other contracts)
  • Costs that do not relate directly to the contract: outside the cost of fulfilling it
  • Impairment loss on the assets used in fulfilling the contract recognised before the provision (IAS 36)

• Basis of allocation of the other directly related costs (case data or assumption)

  TextRequired

  MACHINE_HOURS

IAS 37 §63IAS 37 §64IAS 37 §65IAS 37 §66

• Points examined

  ChecklistRequired

  • No provision for future operating losses (neither a liability nor meeting the recognition criteria)
  • Only the present obligation under an onerous contract is provided for, not the expected loss of the operation
  • Expected future losses: indication that assets of the operation may be impaired, tested under IAS 36

IAS 37 §66IAS 37 §68IAS 37 §68A

• Cost of fulfilling the contract (incremental costs + allocation of other directly related costs)

  Calculation

  425,000

  Incremental costs still to be incurred to fulfil the contract (direct labour, direct materials) ; Allocation of other costs that relate directly to fulfilling contracts (share of the depreciation of equipment used, for example)

• Net cost of fulfilling (cost of fulfilling − expected benefits, if positive: onerous contract)

  Calculation

  0

  Cost of fulfilling the contract (incremental costs + allocation of other directly related costs) ; − Economic benefits expected under the contract (consideration still to be received)

• Excess of expected benefits over the cost of fulfilling (contract not onerous)

  Calculation

  75,000

  Cost of fulfilling the contract (incremental costs + allocation of other directly related costs) ; − Economic benefits expected under the contract (consideration still to be received)

• Least net cost of exiting (lower of the net cost of fulfilling and the exit penalty)

  CalculationRequired

  Net cost of fulfilling (cost of fulfilling − expected benefits, if positive: onerous contract) ; Compensation or penalties arising from failure to fulfil the contract (exit)

  Rule (IAS 37, para. 68; reading adopted in this course): compare the net loss on fulfilling (cost of fulfilling − expected benefits) with the exit penalty, not the gross cost of fulfilling. Example: cost 500, benefits 420, penalty 60 → exit, provision 60; benefits 480 → fulfil, provision 20. Calculated only if the contract provides an exit.

• Saving from exiting (net cost of fulfilling − least net cost of exiting)

  Calculation

  Net cost of fulfilling (cost of fulfilling − expected benefits, if positive: onerous contract) ; − Least net cost of exiting (lower of the net cost of fulfilling and the exit penalty)

• Onerous contract provision (least net cost of exiting)

  CalculationRequired

  0

  Net cost of fulfilling (cost of fulfilling − expected benefits, if positive: onerous contract) ; − Saving from exiting (net cost of fulfilling − least net cost of exiting)

• Prior impairment loss on the assets used

  Entry

  Debit Impairment loss ← Impairment loss determined under IAS 36 on the assets used in fulfilling the contract ; Credit Property, plant and equipment ← Impairment loss determined under IAS 36 on the assets used in fulfilling the contract

  Teaching assumption: the assets used in fulfilling the contract are property, plant and equipment; the amount is data from the IAS 36 test.

• Onerous contract provision

  Entry

  Debit Onerous contract expense ← Onerous contract provision (least net cost of exiting) ; Credit Provision ← Onerous contract provision (least net cost of exiting)

IAS 37 §67IAS 37 §68IAS 37 §68A

• Classification of the contract and least costly route retained

  JudgmentRequired

  Not onerous: no provision

  Onerous, fulfil: provision = cost of fulfilling − expected benefits (higher penalty or no exit provided) / Onerous, exit: provision = exit penalty (lower than the net cost of fulfilling) / Not onerous: no provision / Cancellable without compensation: no obligation

  Professional judgement: identify the directly related costs and the basis for allocating the other costs; the basis retained is case data or a case assumption.

• Rationale: facts relied on, analysis, alternative rejected

  TextRequired

• Impact by caption, derived from the entries above (the Notes line refers to the disclosures)

  TableRequired

• Paragraphs cited in this workpaper (verification status shown from the register)

  References

• The classification of the contract is documentedPass
• The cost allocation basis is documentedPass
• The onerous contract provision is determinedPass
• The impairment entry is balancedNot evaluated
• The provision entry is balancedNot evaluated

Assets

0

Liabilities

0

Profit or loss

0

OCI

0

Equity

0

• Contract examined (counterparty, remaining obligations, termination clauses and penalties)

  TextRequired

  RESIN_PURCHASE_ORDER_CANCELLABLE

• Incremental costs still to be incurred to fulfil the contract (direct labour, direct materials)

  Table

• Allocation of other costs that relate directly to fulfilling contracts (share of the depreciation of equipment used, for example)

  Table

  The allocation basis is case data or a case assumption, never imposed by the standard; it is documented in the cost analysis. Share of depreciation determined after any impairment loss on the assets used: case data.

• Compensation or penalties arising from failure to fulfil the contract (exit)

  Number

  Contract data. If the contract provides for no exit, leave this field blank: there is no exit alternative to compare and the provision is the net cost of fulfilling.

• Economic benefits expected under the contract (consideration still to be received)

  Number

• Impairment loss determined under IAS 36 on the assets used in fulfilling the contract

  Number

  Case data: the impairment test under IAS 36 is performed outside this workpaper.

• Evidence obtained and referenced (category, document reference)

  EvidenceRequired

IAS 37 §3IAS 37IAS 37 §66IAS 37 §67IAS 37 §68

• Points examined

  ChecklistRequired

  • Contract cancellable without paying compensation: no obligation
  • Executory contract that is not onerous: outside the scope
  • Contract with a customer or certain leases that have become onerous: IAS 37 applies
  • Onerous if the cost of fulfilling exceeds the economic benefits expected (positive least net cost of exiting)
  • Least net cost of exiting: the lower of the net cost of fulfilling (cost of fulfilling − expected benefits) and any compensation or penalties arising from failure to fulfil the contract
  • Present obligation under the contract recognised and measured as a provision

IAS 37 §68AIAS 37 §69

• Points examined

  ChecklistRequired

  • Incremental costs of fulfilling the contract (direct labour, direct materials)
  • Allocation of other directly related costs (depreciation of equipment used for this and other contracts)
  • Costs that do not relate directly to the contract: outside the cost of fulfilling it
  • Impairment loss on the assets used in fulfilling the contract recognised before the provision (IAS 36)

• Basis of allocation of the other directly related costs (case data or assumption)

  TextRequired

  NOT_APPLICABLE

IAS 37 §63IAS 37 §64IAS 37 §65IAS 37 §66

• Points examined

  ChecklistRequired

  • No provision for future operating losses (neither a liability nor meeting the recognition criteria)
  • Only the present obligation under an onerous contract is provided for, not the expected loss of the operation
  • Expected future losses: indication that assets of the operation may be impaired, tested under IAS 36

IAS 37 §66IAS 37 §68IAS 37 §68A

• Cost of fulfilling the contract (incremental costs + allocation of other directly related costs)

  Calculation

  0

  Incremental costs still to be incurred to fulfil the contract (direct labour, direct materials) ; Allocation of other costs that relate directly to fulfilling contracts (share of the depreciation of equipment used, for example)

• Net cost of fulfilling (cost of fulfilling − expected benefits, if positive: onerous contract)

  Calculation

  0

  Cost of fulfilling the contract (incremental costs + allocation of other directly related costs) ; − Economic benefits expected under the contract (consideration still to be received)

• Excess of expected benefits over the cost of fulfilling (contract not onerous)

  Calculation

  0

  Cost of fulfilling the contract (incremental costs + allocation of other directly related costs) ; − Economic benefits expected under the contract (consideration still to be received)

• Least net cost of exiting (lower of the net cost of fulfilling and the exit penalty)

  CalculationRequired

  Net cost of fulfilling (cost of fulfilling − expected benefits, if positive: onerous contract) ; Compensation or penalties arising from failure to fulfil the contract (exit)

  Rule (IAS 37, para. 68; reading adopted in this course): compare the net loss on fulfilling (cost of fulfilling − expected benefits) with the exit penalty, not the gross cost of fulfilling. Example: cost 500, benefits 420, penalty 60 → exit, provision 60; benefits 480 → fulfil, provision 20. Calculated only if the contract provides an exit.

• Saving from exiting (net cost of fulfilling − least net cost of exiting)

  Calculation

  Net cost of fulfilling (cost of fulfilling − expected benefits, if positive: onerous contract) ; − Least net cost of exiting (lower of the net cost of fulfilling and the exit penalty)

• Onerous contract provision (least net cost of exiting)

  CalculationRequired

  0

  Net cost of fulfilling (cost of fulfilling − expected benefits, if positive: onerous contract) ; − Saving from exiting (net cost of fulfilling − least net cost of exiting)

• Prior impairment loss on the assets used

  Entry

  Debit Impairment loss ← Impairment loss determined under IAS 36 on the assets used in fulfilling the contract ; Credit Property, plant and equipment ← Impairment loss determined under IAS 36 on the assets used in fulfilling the contract

  Teaching assumption: the assets used in fulfilling the contract are property, plant and equipment; the amount is data from the IAS 36 test.

• Onerous contract provision

  Entry

  Debit Onerous contract expense ← Onerous contract provision (least net cost of exiting) ; Credit Provision ← Onerous contract provision (least net cost of exiting)

IAS 37 §67IAS 37 §68IAS 37 §68A

• Classification of the contract and least costly route retained

  JudgmentRequired

  Cancellable without compensation: no obligation

  Onerous, fulfil: provision = cost of fulfilling − expected benefits (higher penalty or no exit provided) / Onerous, exit: provision = exit penalty (lower than the net cost of fulfilling) / Not onerous: no provision / Cancellable without compensation: no obligation

  Professional judgement: identify the directly related costs and the basis for allocating the other costs; the basis retained is case data or a case assumption.

• Rationale: facts relied on, analysis, alternative rejected

  TextRequired

• Impact by caption, derived from the entries above (the Notes line refers to the disclosures)

  TableRequired

• Paragraphs cited in this workpaper (verification status shown from the register)

  References

• The classification of the contract is documentedPass
• The cost allocation basis is documentedPass
• The onerous contract provision is determinedPass
• The impairment entry is balancedNot evaluated
• The provision entry is balancedNot evaluated

Assets

0

Liabilities

0

Profit or loss

0

OCI

0

Equity

0

• Contract examined (counterparty, remaining obligations, termination clauses and penalties)

  TextRequired

  OBERLIN_GEARBOX_SUPPLY_20X6

• Incremental costs still to be incurred to fulfil the contract (direct labour, direct materials)

  Table

  MATERIALS · DIRECT_MATERIALS · 620,000 | LABOUR · DIRECT_LABOUR · 330,000

• Allocation of other costs that relate directly to fulfilling contracts (share of the depreciation of equipment used, for example)

  Table

  MACHINING · MACHINING_CENTRE_DEPRECIATION_SHARE · 80,000 | BENCH · DEDICATED_TEST_BENCH_DEPRECIATION · 20,000

  The allocation basis is case data or a case assumption, never imposed by the standard; it is documented in the cost analysis. Share of depreciation determined after any impairment loss on the assets used: case data.

• Compensation or penalties arising from failure to fulfil the contract (exit)

  Number

  Contract data. If the contract provides for no exit, leave this field blank: there is no exit alternative to compare and the provision is the net cost of fulfilling.

• Economic benefits expected under the contract (consideration still to be received)

  Number

  1,000,000

• Impairment loss determined under IAS 36 on the assets used in fulfilling the contract

  Number

  75,000

  Case data: the impairment test under IAS 36 is performed outside this workpaper.

• Evidence obtained and referenced (category, document reference)

  EvidenceRequired

IAS 37 §3IAS 37IAS 37 §66IAS 37 §67IAS 37 §68

• Points examined

  ChecklistRequired

  • Contract cancellable without paying compensation: no obligation
  • Executory contract that is not onerous: outside the scope
  • Contract with a customer or certain leases that have become onerous: IAS 37 applies
  • Onerous if the cost of fulfilling exceeds the economic benefits expected (positive least net cost of exiting)
  • Least net cost of exiting: the lower of the net cost of fulfilling (cost of fulfilling − expected benefits) and any compensation or penalties arising from failure to fulfil the contract
  • Present obligation under the contract recognised and measured as a provision

IAS 37 §68AIAS 37 §69

• Points examined

  ChecklistRequired

  • Incremental costs of fulfilling the contract (direct labour, direct materials)
  • Allocation of other directly related costs (depreciation of equipment used for this and other contracts)
  • Costs that do not relate directly to the contract: outside the cost of fulfilling it
  • Impairment loss on the assets used in fulfilling the contract recognised before the provision (IAS 36)

• Basis of allocation of the other directly related costs (case data or assumption)

  TextRequired

  MACHINE_HOURS

IAS 37 §63IAS 37 §64IAS 37 §65IAS 37 §66

• Points examined

  ChecklistRequired

  • No provision for future operating losses (neither a liability nor meeting the recognition criteria)
  • Only the present obligation under an onerous contract is provided for, not the expected loss of the operation
  • Expected future losses: indication that assets of the operation may be impaired, tested under IAS 36

IAS 37 §66IAS 37 §68IAS 37 §68A

• Cost of fulfilling the contract (incremental costs + allocation of other directly related costs)

  Calculation

  1,050,000

  Incremental costs still to be incurred to fulfil the contract (direct labour, direct materials) ; Allocation of other costs that relate directly to fulfilling contracts (share of the depreciation of equipment used, for example)

• Net cost of fulfilling (cost of fulfilling − expected benefits, if positive: onerous contract)

  Calculation

  50,000

  Cost of fulfilling the contract (incremental costs + allocation of other directly related costs) ; − Economic benefits expected under the contract (consideration still to be received)

• Excess of expected benefits over the cost of fulfilling (contract not onerous)

  Calculation

  0

  Cost of fulfilling the contract (incremental costs + allocation of other directly related costs) ; − Economic benefits expected under the contract (consideration still to be received)

• Least net cost of exiting (lower of the net cost of fulfilling and the exit penalty)

  CalculationRequired

  Net cost of fulfilling (cost of fulfilling − expected benefits, if positive: onerous contract) ; Compensation or penalties arising from failure to fulfil the contract (exit)

  Rule (IAS 37, para. 68; reading adopted in this course): compare the net loss on fulfilling (cost of fulfilling − expected benefits) with the exit penalty, not the gross cost of fulfilling. Example: cost 500, benefits 420, penalty 60 → exit, provision 60; benefits 480 → fulfil, provision 20. Calculated only if the contract provides an exit.

• Saving from exiting (net cost of fulfilling − least net cost of exiting)

  Calculation

  Net cost of fulfilling (cost of fulfilling − expected benefits, if positive: onerous contract) ; − Least net cost of exiting (lower of the net cost of fulfilling and the exit penalty)

• Onerous contract provision (least net cost of exiting)

  CalculationRequired

  50,000

  Net cost of fulfilling (cost of fulfilling − expected benefits, if positive: onerous contract) ; − Saving from exiting (net cost of fulfilling − least net cost of exiting)

• Prior impairment loss on the assets used

  Entry

  Account	Debit	Credit
  Impairment loss	75,000
  Property, plant and equipment		75,000

  Teaching assumption: the assets used in fulfilling the contract are property, plant and equipment; the amount is data from the IAS 36 test.

• Onerous contract provision

  Entry

  Account	Debit	Credit
  Onerous contract expense	50,000
  Provision		50,000

IAS 37 §67IAS 37 §68IAS 37 §68A

• Classification of the contract and least costly route retained

  JudgmentRequired

  Onerous, fulfil: provision = cost of fulfilling − expected benefits (higher penalty or no exit provided)

  Onerous, fulfil: provision = cost of fulfilling − expected benefits (higher penalty or no exit provided) / Onerous, exit: provision = exit penalty (lower than the net cost of fulfilling) / Not onerous: no provision / Cancellable without compensation: no obligation

  Professional judgement: identify the directly related costs and the basis for allocating the other costs; the basis retained is case data or a case assumption.

• Rationale: facts relied on, analysis, alternative rejected

  TextRequired

• Impact by caption, derived from the entries above (the Notes line refers to the disclosures)

  TableRequired

• Paragraphs cited in this workpaper (verification status shown from the register)

  References

• The classification of the contract is documentedPass
• The cost allocation basis is documentedPass
• The onerous contract provision is determinedPass
• The impairment entry is balancedPass
• The provision entry is balancedPass

Assets

-75,000

Liabilities

50,000

Profit or loss

-125,000

OCI

0

Equity

-125,000