Strategic Business Reporting (International) · Provisions, contingencies and events after the reporting period

IAS 37 Onerous Contracts, Restructuring and Decommissioning Provisions

Updated 11 October 2026 · Fact-checked

IAS 37 requires a provision when you have a present obligation from a past event, an outflow is probable and you can estimate it reliably. Onerous contracts use the lower of cost of fulfilling and cost of exiting. Restructuring needs a detailed plan and valid expectation. Decommissioning is added to the asset's cost under IAS 16.

Understand Onerous Contracts, Restructuring and Decommissioning

IAS 37 does not give separate rules for each situation. It applies one test to all of them. You recognise a provision when three conditions are met: a present obligation (legal or constructive) exists as a result of a past event, an outflow of economic benefits is probable (more likely than not), and the amount can be estimated reliably. If any condition fails, you do not book a provision. You may disclose a contingent liability instead.

An onerous contract is one where the unavoidable costs of meeting the contract exceed the economic benefits you expect to receive. The unavoidable costs are the lower of the cost of fulfilling the contract and any compensation or penalties for failing to fulfil it. Since the amendment to IAS 37 on onerous contracts (effective for periods beginning on or after 1 January 2022), the cost of fulfilling includes both incremental costs (for example direct labour and materials) and an allocation of other costs directly related to the contract (for example depreciation of equipment used on it). General administrative costs are excluded unless the contract makes them chargeable to the counterparty. Before you book the provision, you recognise any impairment on assets dedicated to the contract under IAS 36.

A restructuring provision is only recognised if there is a constructive obligation. That needs two things at the reporting date: a detailed formal plan identifying the business or part concerned, the main locations affected, the approximate number of employees to be compensated, the expenditure and when it will be implemented; and a valid expectation in those affected that you will carry it out, because you have started to implement the plan or announced its main features to them. A board decision alone is not enough. If the restructuring involves selling an operation, no obligation arises until there is a binding sale agreement. You include only direct expenditure that is necessarily entailed by the restructuring and not associated with ongoing activities, such as redundancy costs. Retraining or relocating continuing staff, marketing and investment in new systems are excluded. Future operating losses are never provided for, because there is no past event.

Decommissioning and environmental obligations arise when an asset is installed or damage is caused. For example, an oil rig must be removed at the end of its life. The obligation exists as soon as the rig is installed, even though cash is spent years later. You recognise a provision at the present value of the expected cost. The matching debit is added to the cost of the asset under IAS 16 and depreciated over the asset's life. The discount unwinds each year as a finance cost in profit or loss. IFRIC 1 covers later changes in the estimate or discount rate. Changes in the provision adjust the asset's cost (in a cost model), subject to the asset not falling below zero, and further depreciation is adjusted prospectively. Under IAS 37, an environmental provision for contamination is recognised when the entity has a legal or constructive obligation to clean up. A constructive obligation can arise from a published policy or past practice that creates a valid expectation.

Key rules to remember

Recognition test: Present obligation from past event AND outflow probable (> 50%) AND reliable estimate; All three must be met. If not, disclose a contingent liability unless the outflow is remote.
Onerous contract provision: Provision = lower of (unavoidable cost of fulfilling − expected benefits) and (penalty for exit); Cost of fulfilling = incremental costs + allocation of other costs directly related to the contract. Impair dedicated assets first under IAS 36.
Restructuring provision: Provision = direct costs necessarily entailed by the restructuring and not associated with ongoing activities; Needs a detailed formal plan and a valid expectation at the reporting date. Exclude retraining, relocation of continuing staff, marketing and future operating losses.
Decommissioning on initial recognition: Dr Asset (IAS 16 cost); Cr Provision, both at present value of expected future cost; Discount at a pre-tax rate reflecting current market assessments of time value and risks specific to the liability.
Unwinding of discount: Finance cost = opening provision × discount rate; Charge to profit or loss each year and add to the provision.
Future operating losses: No provision; There is no past event. Consider impairment of the related assets instead.

How to solve Onerous Contracts, Restructuring and Decommissioning questions

Use the same sequence for any IAS 37 scenario question. It keeps you on the requirement and earns both technical and professional skills marks.

1Identify the situation: onerous contract, restructuring, decommissioning or environmental, or future operating loss.
2Test the three recognition criteria at the reporting date. Look for the past event and say what it is.
3For restructuring, check the detailed plan and the valid expectation at the year end. A decision after the year end is a non-adjusting event under IAS 10 unless it is a disclosure matter.
4Measure the amount. Use the best estimate, discount if the effect is material, and include only costs that qualify.
5Post the double entry. Onerous contract: expense. Decommissioning: add to asset cost. Restructuring: expense. Show the unwinding.
6Consider related standards: IAS 36 impairment before an onerous provision, IAS 16 for the asset, IAS 10 for post year-end events.
7State the conclusion and the disclosures needed, and apply it to the company in the scenario.

Quickest way: Four-question screen

When to use it: Use this when you have limited time and need a fast structure for a short provision requirement.

Ask: what is the past event at the reporting date? No event, no provision.
Ask: is there a legal or constructive obligation? For restructuring, is the plan detailed and announced or started?
Ask: what is the cost? Strip out anything linked to ongoing activities or future operations.
Ask: where does the debit go? Decommissioning goes to the asset. Everything else goes to profit or loss. Then add the unwinding.

Common mistakes in Onerous Contracts, Restructuring and Decommissioning

Providing for a restructuring because the board approved it before the year end.
Students treat a decision as an obligation.
Fix: Check for a detailed plan and a valid expectation (announcement or implementation started) by the reporting date. Without these, no provision.
Including retraining, relocation of continuing staff or marketing costs in a restructuring provision.
These costs feel linked to the restructuring.
Fix: Include only direct costs necessarily entailed and not associated with ongoing activities. Redundancy and contract termination penalties qualify.
Providing for future operating losses.
Students want to show the weak performance in the current year.
Fix: State that there is no past event. Consider whether related assets are impaired under IAS 36 instead.
Charging the decommissioning cost to profit or loss on day one.
Students treat every provision as an expense.
Fix: Add the present value to the asset's cost under IAS 16, and depreciate it. Only the unwinding of the discount goes to finance cost.
Measuring an onerous contract using only incremental costs, or including general overheads.
Students recall the old rule or include everything.
Fix: Use incremental costs plus an allocation of other directly related costs, such as depreciation of equipment used. Exclude general administration.
Forgetting to discount a long-term provision and to unwind it.
Students stop after the initial measurement.
Fix: Discount when the effect is material, and show the finance cost each year at the opening balance times the rate.

Worked examples

Example 1

Arvind Co has a five-year contract to supply parts to a customer at $40 per unit for 10,000 units. At the reporting date the cost to produce each unit has risen to $46, of which $4 is an allocation of depreciation on dedicated machinery. The machinery is not impaired. Arvind can cancel by paying a penalty of $90,000. Ignore discounting. Should Arvind record a provision for the contract, and how much?

Show the solution

The contract is onerous if the unavoidable cost of meeting it exceeds the expected benefits.
Cost of fulfilling: $46 × 10,000 = $460,000. The cost includes the depreciation allocation, because it is directly related to the contract.
Expected benefits: $40 × 10,000 = $400,000.
Net cost of fulfilling: $460,000 − $400,000 = $60,000.
Cost of exit: the penalty is $90,000, but under IAS 37 the unavoidable cost is the lower of the net cost of fulfilling and the penalty. Lower of $60,000 and $90,000 is $60,000.
Recognise a provision of $60,000 with a charge to profit or loss. No IAS 36 impairment arises as the machinery is not impaired.

Answer: Arvind should recognise an onerous contract provision of $60,000 and a matching expense.

Example 2

On 1 January 20X1 Seabed Co brought an offshore platform into use at a cost of $20 million. It must dismantle the platform at the end of its 10-year life, and the expected cost is $8 million at that date. The discount rate is 8%. The discount factor for 10 years at 8% is 0.463. Calculate the amounts for the year ended 31 December 20X1 and the provision at that date. Assume the platform is depreciated straight line with no residual value.

Show the solution

Present value of the decommissioning cost: $8m × 0.463 = $3.704m.
Initial entry: Dr Asset $3.704m, Cr Provision $3.704m.
Cost of the platform for depreciation: $20m + $3.704m = $23.704m.
Annual depreciation: $23.704m ÷ 10 = $2.3704m.
Unwinding of the discount: $3.704m × 8% = $0.29632m, charged as a finance cost and added to the provision.
Provision at 31 December 20X1: $3.704m + $0.29632m = $4.00032m.

Answer: Depreciation is $2,370,400, the finance cost is $296,320 and the provision at 31 December 20X1 is $4,000,320 (about $4.0 million).

Exam tips

In restructuring questions, the date matters. Look for when the plan was announced or implemented compared with the reporting date, and say so explicitly.
Scenarios often mix qualifying and non-qualifying costs. Go line by line and state the reason for including or excluding each cost.
For decommissioning, show both the asset and the provision entries. Mark schemes reward the link between IAS 16 and IAS 37.
Earn professional skills marks by commenting on the judgement involved, the risk of profit smoothing through provisions, and the ethical angle if management wants to over-provide.
Where the question says an amount is to be paid years later, expect discounting and an unwinding calculation.

Practice questions from Provisions, contingencies and events after the reporting period

Onerous Contracts, Restructuring and Decommissioning in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Onerous Contracts, Restructuring and Decommissioning: frequently asked questions

What changed in the IAS 37 onerous contract amendment?

The amendment clarified that the cost of fulfilling a contract includes all costs directly related to it. That means incremental costs plus an allocation of other directly related costs, such as depreciation of equipment used. It applies to periods beginning on or after 1 January 2022.

When can you recognise a restructuring provision?

Only when you have a constructive obligation at the reporting date. You need a detailed formal plan and a valid expectation in those affected, created by starting to implement the plan or announcing its main features. A sale of an operation also needs a binding sale agreement.

Why is a decommissioning cost added to the asset?

The obligation arises because you installed the asset, so the cost is part of getting it into use. IAS 16 includes the initial estimate of dismantling costs in the cost of the asset. You then depreciate it over the asset's life.

Do I provide for expected future operating losses?

No. Future operating losses do not arise from a past event, so no obligation exists. The expectation of losses may be a sign that assets are impaired, so test them under IAS 36.