An onerous contract is defined as one where the costs of fulfilling the contract exceed the economic benefits derived from it, as per IAS 37. To identify such contracts, a comprehensive analysis of the entire contract is necessary, particularly in cases of rising costs or falling benefits. When identified, onerous contracts require accounting adjustments to reflect anticipated losses, with IFRS recognizing them as provisions on the liability side of the balance sheet.

1. Onerous Contract
By:-
eFinanceManagement.com
https://efinancemanagement.com/financial-accounting/onerous-contract

2. Content
1. Meaning
2. How to Identify?
3. Accounting Treatment

3. Meaning
 An onerous contract can be defined as a contract which becomes a financial burden for the company when the total
cost of accomplishing such project exceeds its economic benefits.
 As per IAS 37, it is a contract in which unavoidable costs of meeting the obligation under the contract exceed the
economic benefits expected to be received under it.

4. How to Identify?
 Full contract is analysed rather than item by item performance to identify whether or not a contract is onerous or not.
Project may becomes onerous if there is a rise in the cost or a drop in the benefits of that projects.
 For example, when the tenant is paying the rent of a property, but he is not using it, it is an onerous contract as he is
not being awarded any benefits from the property and yet he have to incur the cost for the same.

5. Accounting Treatment
 When a contract is identified as onerous, it must make accounting adjustments. The accounting treatment must
account for the anticipated losses.
 GAAP (Generally Accepted Accounting Principles) doesn’t recognize such contracts but IFRS (International
Financial Reporting Standards) does.
 IAS 37 recognizes such contracts as ‘provisions’ which means liability whose amount & timing is not known. It can be
estimated on the basis of current obligations. And hence, it is shown on the liability side of the Balance Sheet. The
total cost includes all the expenses directly related to the contract.
 Examples of such costs are: direct labour, depreciation of machinery and tools, payment to subcontractor, etc.

6. Reference
To know more about it, click on the link given below:
https://efinancemanagement.com/financial-accounting/onerous-contract