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

Date recorded:


In June 2017, the IC discussed what costs an entity should consider when assessing whether a contract is onerous in terms of IAS 37. The IC concluded that there are two reasonable interpretations of what constitutes ‘unavoidable costs’:

  • All costs that are necessary to complete a contract. This would include a share of costs that would have been incurred even without the contract, e.g. depreciation on assets used in other contracts and common overheads.
  • Costs that an entity would not incur if it did not have the contract (often referred to as incremental costs).

The IC also concluded that it would not be wise to amend some of the requirements on onerous contracts (i.e. considering what constitutes unavoidable costs only) without conducting a comprehensive review of all of those requirements. However, that would be beyond the ambit of the IC and so it decided not to add the matter onto its agenda.

Feedback from comment letters received

Eleven comment letters were received, ten of which suggested standard-setting activities are necessary to clarify the onerous contract requirements in IAS 37.68 in order to reduce diversity in practice. Such diversity is expected to increase once IFRS 15 becomes effective as IFRS 15 requires an entity to apply IAS 37 when assessing whether a contract with a customer is onerous, including those that were previously assessed based on the requirements of IAS 11. Most of these respondents believe that a narrow-scope amendment to clarify what constitutes unavoidable costs could help achieve consistency in interpretation.

No significant comments were raised with regard to the two interpretations of unavoidable costs provided by the IC. Some respondents suggested other interpretations that they think were appropriate.

Staff analysis

For the reasons given by the IC in its June 2017 meeting, the Staff continued to believe that it would not be feasible to develop a narrow-scope amendment to IAS 37 with regard to unavoidable costs separately from a wider project on onerous contracts, or even on IAS 37 as a whole.

Staff recommendation

The Staff recommended that the IC:

  • finalise the agenda decision subject to drafting changes, and
  • ask the Board to consider adding a narrow-scope research project on onerous contracts to its work plan.


The IC did not vote on this paper but decided not to finalise the agenda decision. Instead, in light of the feedback received, the IC has asked the Staff to research into the possible scope of a project on onerous contracts for discussion at a future meeting. The Staff will notify the Board of this decision and will update them on the progress of the project to make sure it ties in with the Board’s wider project plan on IAS 37 that is in the research pipeline. The Staff will also consider the possibility of producing educational material regarding what is meant by ‘unavoidable costs’ in the meantime.

Most of the IC members saw the need for standard-setting given the feedback received. In addition to undertaking further research, a few members were in favour of finalising the agenda decision in order to limit the diversity in practice to the two views in the tentative agenda decision. They acknowledged that although this may not the best solution, it is better than having no guidance at all. However, some other members were concerned that such a limitation may have unintended consequences given that they had not considered the other possible interpretations raised by the respondents in their comment letters.

One IC member suggested limiting the scope of the project to contracts within the scope of IFRS 15 (particularly those onerous contracts that are currently accounted for under IAS 11) because this would have the least disturbance on onerous contracts that are already accounted for under IAS 37. The other IC members did not support this idea because they thought that any analysis on onerous contracts would inevitably touch on areas beyond IFRS 15. Also, it is too late to try to fix IFRS 15 issues now with implementation only a few months away.

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