Onerous contract

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

2. Content Meaning How to Identify? 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