The International Accounting Standards Board’s (IASB) Exposure Draft, “Onerous Contracts – Cost of Fulfilling a Contract” (Proposed amendments to IAS 37)” was issued in December 2018. The Exposure Draft seeks to specify the costs an entity should include in determining the “cost of fulfilling” a contract for the purpose of assessing whether a contract is onerous.
Additionally, the Exposure Draft:
- provides examples of costs that do, and do not relate directly to a contract; and
- requires the entity to apply the amendments as an adjustment to the opening balance of retained earnings (or other component of equity, as appropriate) at the date of initial application. Full retrospective approach is not allowed.
The AcSB’s due process includes ensuring that Canadian entities’ financial reporting needs are considered by the IASB. On April 15, 2019, we issued our own response letter to the IASB’s Exposure Draft.
We commended the IASB’s work to clarify which costs to include in determining the cost of fulfilling a contract as it will reduce diversity in practice created by the removal of IAS 11 Construction Contracts.
Overall, we agree that the cost of fulfilling a contract should comprise the costs that relate directly to the contract. However, we are concerned with the IASB’s decision not to address the meaning of economic benefits as part of this Onerous Contracts project. We are of the view that both the economic benefits and the cost of fulfilling a contract are important elements in determining whether a contract is onerous and should be addressed together.
Read the Board’s letter submitted to the IASB.
Stay up-to-date on this project via the online project page.
Sean Wang, CPA, CA, CFA
Principal, Accounting Standards Board
Phone no.: +1 (416) 204-2969