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October 2022

Onerous Contracts – Amendments to Ind AS 37

By Dolphy D’souza, Chartered Accountant
Reading Time 5 mins
This article explains the recent amendment to Ind AS 37 Provisions, Contingent Liabilities and Contingent Assets with respect to the measurement of onerous contracts.

An onerous contract is defined under paragraph 10 of Ind AS 37 as “a contract in which the unavoidable costs of meeting the obligations under the contract exceed the economic benefits expected to be received under it.”

Paragraph 68 further elaborates, “The unavoidable costs under a contract reflect the least net cost of exiting from the contract, which is the lower of the cost of fulfilling it and any compensation or penalties arising from failure to fulfil it.”

The example below explains the above requirements.

EXAMPLE – Measurement of Onerous Contract

Let’s say, the revenue on a contract is Rs. 100, cost of the contract is Rs. 120, and cost of exiting or cancelling the contract is a penalty of Rs. 10. In this case, if the contract is executed, the cost of fulfilling the contract is Rs. 20, but if the contract is cancelled, the cost is Rs. 10. Therefore, a provision for an onerous contract of Rs. 10 is made, being lesser of Rs .20 and Rs. 10. On the other hand, if the cost of the contract is Rs. 120, and cost of exiting or cancelling the contract is a penalty of Rs. 30, a provision of Rs. 20 is made, being lesser of Rs. 20 and Rs. 30.

Prior to the amendment, there was no clarity on how the cost of fulfillin
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