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

Date recorded:

IAS 37 Provisions, Contingent Liabilities and Contingent Assets—Costs considered in assessing whether a contract is onerous (Agenda Paper 6)


In November 2017 the Committee decided to add a narrow-scope standard-setting project to its agenda. The objective of the project is to clarify the meaning of the term ‘unavoidable costs’ in the definition of an onerous contract in IAS 37:68. In March 2018, the Committee recommended that the Board should: (a) specify that the ‘cost of fulfilling’ a contract comprises the ‘costs that relate directly to the contract’; (b) provide examples of costs that do (and do not) relate directly to a contract to provide goods or services; and (c) develop its proposals as a narrow-scope amendment to IAS 37. In addition, a Committee member asked whether the Board should propose specific disclosure requirements as part of its project to amend IAS 37.

The staff concluded that the proposed amendments are narrow in scope and would not change the underlying principle or general requirements for onerous contracts. Also, the use of estimates in determining the cost of fulfilling a contract is not a new requirement that would result from the proposed amendment. Accordingly, the staff consider the proposed amendments to IAS 37 would not create the need for additional disclosure requirements and hence recommend to propose no new disclosure requirements.

With regards to transition requirements, the staff analysed the application of retrospective, prospective and modified retrospective application of the amendment in the paper. The staff recommend proposing that entities already reporting using IFRS Standards apply the proposed amendments only to contracts existing at the date of initial application (modified retrospective application). The staff do not recommend proposing any specific transition requirements for first-time adopters.


The Committee discussed the proposal of modified retrospective approach in applying the amendments. Most Committee members considered the modified retrospective approach (which the opening effect to profit or loss is adjusted to retained earnings) appropriate because this can reduce undue cost of developing the information to be disclosed. One Committee member suggested the modified retrospective approach with an option of full retrospective approach but another Committee member considered that it will cause another dimension of complexity for the users of the financial statements to understand the impact of changes in circumstances and the impact of changes in the accounting parameters used.


The Committee decided, by majority vote, on initial application of the proposed amendments entities would be required to use a modified retrospective application with no option for full retrospective application and no specific transition provision for first-time adopters.

The Committee decided, by majority vote, to propose no new disclosure requirements.


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