Tentative Agenda Decision and comment letters—IAS 37 Costs considered in assessing whether a contract is onerous

 

The IFRS Interpretations Committee tentatively decided not to add this matter to its standard-setting agenda at its meeting in June 2017. The Committee will reconsider the following tentative agenda decision, including the reasons for not adding the matter to the standard-setting agenda, at a future meeting. The Committee encourages interested parties to submit their responses using the link below.

Tentative agenda decision

The Committee received a request to clarify which costs an entity considers when assessing whether to recognise an onerous contract provision applying IAS 37. In particular, the submitter asked about the application of IAS 37 to contracts with customers previously within the scope of IAS 11 Construction Contracts.

As noted in paragraphs 5(g) of IAS 37 and BC296 of IFRS 15 Revenue from Contracts with Customers, an entity applies paragraphs 66–69 of IAS 37 in assessing whether a contract to which it applies IFRS 15 is onerous. Accordingly, the Committee concluded that, when determining which costs to include in assessing whether such a contract is onerous, the entity does not apply the previous requirements in IAS 11 on contract costs, nor does it apply the requirements in IFRS 15 on costs that relate directly to a contract.

Paragraph 68 of IAS 37 includes the definition of an onerous contract. In assessing whether a contract is onerous, an entity compares the unavoidable costs of meeting the obligations under the contract to the economic benefits expected to be received under it. The unavoidable costs under the contract are the lower of the cost of fulfilling the contract and any compensation or penalties arising from failure to fulfil the contract.

The Committee discussed two possible ways of applying the requirements in paragraph 68 of IAS 37 relating to the unavoidable costs of fulfilling the contract:

  1. unavoidable costs are the costs that an entity cannot avoid because it has the contract (for example, an entity would include an allocation of overhead costs if those costs are incurred for activities required to complete the contract).
  2. unavoidable costs are the costs that an entity would not incur if it did not have the contract (often referred to as ‘incremental costs’).

The Committee concluded that a reasonable reading of the requirements in paragraph 68 of IAS 37 on unavoidable costs of fulfilling a contract results in one of the two approaches outlined in this agenda decision. The Committee observed that an entity applies its reading of the requirements consistently to all applicable contracts.

The Committee also observed that paragraph 69 of IAS 37 requires an entity to recognise any impairment loss on assets dedicated to a contract before establishing a separate provision for an onerous contract.

In the light of its analysis, the Committee considered whether to add a project to its standard-setting agenda to eliminate one of the possible ways of reading the requirements. The Committee decided that amendments could not be developed for some of the requirements on onerous contracts without conducting a comprehensive review of all of those requirements. With this in mind, the Committee concluded that it would be unable to resolve the matter efficiently within the confines of existing IFRS Standards. Consequently, it [decided] not to add this matter to its standard-setting agenda.

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