Understanding Onerous Contracts: Definition, Accounting, and Implications

This article explains what an onerous contract is—a legally binding agreement where the costs to fulfill it exceed the expected economic benefits. It outlines the key characteristics, common causes (such as economic shifts, regulatory changes, and unforeseen cost increases), and the required accounting treatment under standards like IAS 37 and GAAP. With practical examples across leases, construction, supply, and service contracts, the article highlights how businesses can identify, account for, and manage onerous contracts to ensure accurate financial reporting and mitigate risk.