IASB / FASB 1 March 2011

The IASB and the FASB continued their discussion from February 2011 on how an entity would test a contract to determine whether it is onerous.

The boards tentatively decided that the onerous test should apply to all contracts, including those that are intentionally priced at a loss in the expectation of profits to be generated on subsequent contracts with the customer (ie 'loss-leader' contracts).

The boards tentatively affirmed the proposal in the exposure draft Revenue from Contracts with Customers that the costs to be included in the onerous test and in measuring an onerous liability should be the costs that relate directly to satisfying the remaining performance obligations (as described in paragraph 58 of the exposure draft). The boards observed that when an entity is committed to cancelling a contract and has the contractual right to do so, the costs would reflect the amount that the entity would have to pay to cancel the contract (eg the amount it would have to refund the customer, including any penalties). The boards also observed that cancelling the contract may give rise to other obligations that would be accounted for in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets or Topic 450 Contingencies in the FASB Accounting Standards Codification®.

No formal vote was taken, but all board members present supported this general approach.