IAS 37- Provisions, Contingent Liabilites & Assets

Question 1

Q34. Wing- Onerous Contracts

Contracts where penalties incurred & some contracts where no penalty

Answer 1

An onerous contract: costs of fulfilling exceed economic benefits expected.

**Unavoidable costs: **Reflect minimum cost of exiting the contract (lower of fulfillment cost or cancellation compensation).

Before establishing separate provision:

Impairment loss: Recognised if occured on assets dedicated to onerous contracts.

**IAS 37 Requirement: **Entity recognizes and measures present obligation under onerous contracts as provisions.

Pandemic Impact: Global supply chain disruption.

Example: Wing Co’s conracts to sell goods affected by shutdown of manufacturing facilities, leading to inability to deliver without buying from TP at higher cost.

Review of contracts: Identify special terms relieving obligations or cancellable contracts w/o compensation.

Conclusion: Contract w/o obligations not deemed onerous.