A contract whose costs outweigh its potential benefits. More specifically, the unavoidable costs of meeting the obligations under this contract (and hence would fulfill it) are higher than the economic benefits that an entity expects to obtain under it. The costs of meeting the obligations under an onerous contract are the lower of: 1) the costs of fulfilling the contract and 2) the costs of terminating it.
The costs of fulfilling a contract mainly include:
- the incremental costs – e.g. direct labor and materials.
- an allocation of other direct costs – e.g. an allocation of the depreciation expense associated with an item of property, plant and equipment used in fulfilling the contract.
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