IAS 37 — Costs considered in assessing whether a contract is onerous

Date recorded:

Items on the current agenda — Agenda Paper 5


In its September 2017 meeting, the IC tentatively decided to add a narrow-scope project to clarify the meaning of ‘unavoidable costs’ in the definition of an onerous contract.

In this paper, the Staff considered the scope of the potential clarification.

Staff analysis

The Staff considered the following aspects about the scope and form of the potential clarification regarding onerous contracts:

  1. Should the clarification apply to onerous contracts within the scope of IFRS 15 only (as the original query submitted to the IC related to IFRS 15 contracts only), or to all onerous contracts within the scope of IAS 37?
  2. In addition to the identification of an onerous contract, should the IC consider measurement of onerous contracts as well?
  3. In addition to clarifying the meaning of unavoidable costs, should the IC consider other aspects of the definition of an onerous contract, e.g. ‘economic benefits expected to be received under the contract’?
  4. Should the IC develop an interpretation, a separate amendment or an amendment to be included in an annual improvements project for the proposed clarification?

With regard to (1), the Staff believed that all onerous contracts should be accounted for in the same way. Drawing a distinction between those that are within the scope of IFRS 15 and those that are outside its scope would create unnecessary inconsistency and could also lead to inappropriate application of the new requirements by analogy to onerous contracts that are not within the scope of IFRS 15, in the absence of clear guidance on how to interpret ‘unavoidable costs’ for the latter. Furthermore, the Staff observed that currently, operating leases make up the majority of onerous contracts. This number is expected to reduce significantly upon application of IFRS 16. Consequently, the potential impact of any new requirements to these entities is not expected to be significant.

As regards (2) and (3), the Staff acknowledged that there are valid calls from stakeholders for the Board to perform a comprehensive review of the onerous contract requirements. However, the Staff was wary that broadening the scope of the project would invariably delay completion of the project, which is undesirable in light of the urgency of the matter. Consequently, the Staff recommended that the Board limit the scope of the project to clarifying the meaning of ‘unavoidable costs’ without considering other aspects of the definition, and to address the identification of onerous contract only and not to address the measurement aspect of it as well. Such a project would best be undertaken as a separate narrow-scope amendment to IAS 37.

Staff recommendation

In light of the above, the Staff recommended that the IC develop a narrow-scope amendment to IAS 37 to clarify the meaning of ‘unavoidable costs’ in the definition of an onerous contract.

Next steps

The Staff will ask the Board whether it agrees with the proposed scope of the project.


The IC agreed with the Staff’s recommendation but decided to leave open the decision on what form the clarification should take until the project is more mature.

The IC generally agreed with the Staff on questions 1 and 2 above, but there were mixed views with regard to whether the IC should consider clarifying the economic benefits aspects of the definition of an onerous contract.

It was a debate of whether the clarification would be meaningful if the IC just looked at the cost side of the equation and not the benefits side, versus delaying the completion of the project in light of past failed attempts to clarify the economic benefits requirements. The Staff reminded the IC that assessing economic benefits is not straight-forward because it touches on questions such as do you look beyond the existing contract to estimating future economic benefits? Are there cases where you will need to componentise a contract and only take a portion of the economic benefits into account? There are also different approaches in different standards on what economic benefits entail, which not necessarily a problem because of the different contract types; however, since IAS 37 applies to a variety of contracts, those existing notions cannot be easily borrowed for use in IAS 37.

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