• Accounting Alert

Supply chain disruptions, higher prices, and accounting standard changes – What this means for 31 December 2022 financial statements

An amendment to NZ IAS 37 Provisions, Contingent Liabilities and Contingent Assets, Onerous Contracts — Cost of Fulfilling a Contract, includes changes that could impact a number of entities for the first time in their 31 December 2022 annual financial statements.

Supply chain disruptions, higher prices, as well as a recent change to NZ IAS 37 Provisions, Contingent Liabilities and Contingent Assets mean that some entities may need to recognise onerous contract provisions for the first time because higher input prices are turning previously profitable contracts unprofitable, and other entities may need to increase the amount of their onerous contract provisions.

Cost of fulfilling a contract for assessing whether a contract is onerous

If an entity has a contract that is onerous, it must recognise and measure the present obligation under the contract as a provision for onerous contracts.

An onerous contract is a contract in which the unavoidable costs of meeting the obligations under the contract exceed the economic benefits expected to be received under it.
Definition of ‘onerous contract’ in NZ IAS 37

The unavoidable costs under a contract reflect the least net cost of exiting from the contract, which is the lower of the:

  • Cost of fulfilling the contract
  • Any compensation or penalties arising from failing to fulfil the contract

The amendments clarify that the costs of fulfilling the contract comprises the costs that relate directly to the contract and include both:

  • The incremental costs of fulfilling the contract, such as direct labour and overheads
  • An allocation of other costs that relate directly to fulfilling contracts, such as an allocation of depreciation charge for an item of property, plant and equipment used in fulfilling that contract among others.

Preparers should carefully consider unprofitable and thin-margined contracts to ensure onerous contract provisions have been correctly measured in their 31 December 2022 financial statements, taking into account all costs of fulfilling a contract noted above.

Effective date

The amendments apply to annual periods beginning on or after 1 January 2022.

Transitional requirements

The amendments apply to contracts for which the entity has not yet fulfilled all its obligations at the beginning of the annual period to which the amendment first applies (i.e., 1 January 2022 for a 31 December 2022 year-end, or 1 July 2022 for a 31 December 2022 half-yearend).

Comparative need not be restated, and any adjustments for additional onerous contract provisions required is made via an adjustment to opening retained earnings at the date of initial application (1 January 2022 for a 31 December 2022 year-end, or 1 July 2022 for a 31 December 2022 half-year).

Need assistance?

Please contact our BDO IFRS Advisory team if you require assistance assessing your onerous contract provisions.


For more on the above, please contact your local BDO representative.

This publication has been carefully prepared, but is general commentary only. This publication is not legal or financial advice and should not be relied upon as such. The information in this publication is subject to change at any time and therefore we give no assurance or warranty that the information is current when read. The publication cannot be relied upon to cover any specific situation and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact the BDO member firms in New Zealand to discuss these matters in the context of your particular circumstances.
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