Onerous Contract

DEFINITION of 'Onerous Contract'

A type of contract where the costs involved with fulfilling the terms and conditions of the contract are higher than the amount of economic benefit received. According to the International Accounting Standards (IAS), there are two methods for the recognition of a provision for this type of contract: the liability and impairment approaches.

BREAKING DOWN 'Onerous Contract'

The liability approach refers to the onerous contract as a liability for the company's contractual responsibilities.

The impairment approach refers to a lease-related onerous contract as both an unrecognized asset and liability. Furthermore, the contract uses a long-lived asset impairment recognition system.

Onerous contracts can occur in situations where a company has a contract to supply a product that costs more to produce (for example, due to a rise in raw material costs) than originally determined by the terms of the contract.

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