On 14 May 2020, the International Accounting Standards Board (IASB) published 'Onerous Contracts — Cost of Fulfilling a Contract (Amendments to IAS 37)' amending the standard regarding costs a company should include as the cost of fulfilling a contract when assessing whether a contract is onerous.
The existing requirements regarding onerous contracts in IAS 37 Provisions, Contingent Liabilities and Contingent Assets can have different interpretations which could have a material effect on entities that enter into those contracts. The aim of the amendment to IAS 37 Onerous Contracts — Cost of Fulfilling a Contract is to clarify what costs an entity considers when assessing whether a contract is onerous.
The changes in Amendments to IAS 37 Onerous Contracts — Cost of Fulfilling a Contract specify that the ‘cost of fulfilling’ a contract comprises the ‘costs that relate directly to the contract’. Costs that relate directly to a contract can either be incremental costs of fulfilling that contract (examples would be direct labour, materials) or an allocation of other costs that relate directly to fulfilling contracts (an example would be the allocation of the depreciation charge for an item of property, plant and equipment used in fulfilling the contract).
Effective date and transition requirements
The amendments to IAS 37 are effective for annual periods beginning on or after 1 January 2022. Early application is permitted.
Entities apply the amendments to contracts for which the entity has not yet fulfilled all its obligations at the beginning of the annual reporting period in which the entity first applies the amendments. Comparatives are not restated.