Implementation matters

Date recorded:

Onerous Contracts—Cost of Fulfilling a Contract (Proposed amendments to IAS 37)

Costs that directly relate to the contract (Agenda Paper 12)


The Board published Exposure Draft Onerous Contracts—Cost of Fulfilling a Contract (Proposed amendments to IAS 37) (the ED) in December 2018. This paper analyses the feedback on the first question in the ED—whether respondents agree that IAS 37 should specify that the cost of fulfilling a contract comprises the costs that relate directly to the contract.

Staff conclusions

The IASB received 67 responses which the staff say mostly supported the proposals, albeit with some caveats. The staff paper responds to matters raised by respondents:

  • The consistency with other parts of IAS 37
  • Whether the proposed amendments would improve the information about contracts priced to exceed only incremental costs, contracts in which the penalties for not fulfilling a contract are higher than the incremental costs, as a consequence of interactions with the impairment requirements and for other non-construction contracts
  • The cost of applying the proposals in particular industries
  • Whether the Board should defer finalising this amendment until other parts of IAS 37 have been considered

The staff assessment was that none of the concerns expressed warrant changes to the proposals and that the benefits of the proposed amendment would outweigh the costs.

Due to the confirmed diversity of practice, and the early stage of the provisions project, the staff also concluded that the Board should finalise the amendments now, rather than absorb them into a wider-scope project to amend IAS 37.

Staff recommendations

Staff recommended that the Board:

  • a) proceed with its project to make a narrow-scope amendment to IAS 37 to clarify which costs to include in determining the ‘cost of fulfilling’ a contract for the purpose of assessing whether the contract is onerous; and
  • b) specify, as proposed in the ED, that the costs comprise the costs that relate directly to the contract.

Board discussion

Board members generally supported the staff recommendation to proceed with the amendments and to continue to use direct cost instead of incremental cost when determining the cost of fulfilling a contract. However, they acknowledged stakeholder responses that preferred incremental cost. There was some discussion about ‘idle capacity’. Some Board members found it counterintuitive that if idle capacity is sold for incremental cost that would be an onerous contract when all overhead cost is covered by other profitable contracts. One Board member suggested to discuss this issue with the IASB’s Capital Markets Advisory Council. It was noted that seasonal fluctuations would not lead to an onerous contract if from an annual point of view, the contract was profitable.

There was also discussion around respondent’s comments about what the unit of account would be when assessing whether contracts are onerous. The staff noted that IAS 37 is silent on this issue and that it might be appropriate to apply the onerous contracts requirements to a portfolio of similar contracts. The amendments would not change the unit of account requirements. Board members confirmed that no change was intended with the amendments.

Board decision

13 Board members voted in favour of the staff recommendation.

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