The IASB exposure draft (ED) and re-exposure draft (RED) on revenue recognition discuss how onerous contracts should be reported and measured.
Refer to the IASBs ED and RED "Revenue Recognition in Contracts with Customers" from June 2010 and November 2011, respectively, available on the IASB website at www.ifrs.org. Answer the following questions with respect to onerous contracts.
(a) 'What is an onerous contract? 'What is its significance to revenue recognition?
(b) For each of the following examples, assess whether the contracts have become onerous.
1. A construction contract has customer consideration totalling $500,000. The company had originally estimated costs to perform under the contract to be $425,000, resulting in profits of $75,000. However, during the contract, material costs increased substantially, so that the current total expected costs of the contract are now $460,000.
2. A gold producer has entered into a contract to sell 1,000 ounces of gold (originally over a two-year period) to a customer at a price of$600 per ounce. Currently, the selling price of gold has risen to S850 per ounce. The costs to produce the gold are $250 per ounce.