Direct answer
A loss forecast is not automatically a provision. Ind AS 37 distinguishes future operating losses from an onerous contract’s present obligation. For a binding contract, compare the supported net cost of performance with the compensation or penalties for non-performance to identify the least net exit cost. Include directly related cost allocations in fulfilment costs, and recognise relevant asset impairment before establishing a separate onerous-contract provision. ICAI: Ind AS 37, paragraphs 59, 61–69 and 105; direct fulfilment costs and onerous contracts.
Applicable framework
This guide addresses entities applying Ind AS, using paragraphs 63–69 of ICAI’s Ind AS 37 compendium, checked on 27 October 2026. Paragraph 68A’s direct-cost clarification and paragraph 69’s asset-impairment sequence apply for annual reporting periods beginning on or after 1 April 2022 under paragraph 105. The examples assume simple enforceable contracts, reliable estimates, short settlement periods and no material discounting, taxes or recoveries. Other standards’ scope and recognition requirements must also be considered.
Start with the obligation and the remaining contract
Identify the enforceable remaining rights and obligations at the reporting date. A cancellable order with no compensation can differ from a binding supply commitment. Do not use historic sunk expenditure as though it were a new future settlement cost. Evaluate the actual contract, including enforceable exit clauses and any supported modifications, rather than assuming the full order value is a penalty.
Fulfilment costs extend beyond incremental spending
Paragraph 68A includes direct labour and materials and allocations of other costs directly related to fulfilling contracts, such as relevant equipment depreciation. A model restricted to incremental cash purchases can therefore miss a loss. Conversely, an indiscriminate share of corporate overhead does not become directly related merely because it was allocated by a spreadsheet. Document the causal basis, capacity assumptions and consistency of the allocation.
Compare equivalent net alternatives
The performance route retains the contract benefits and incurs the relevant costs; the exit route may forgo those benefits and incur compensation. Compare equivalent net outcomes. In the simple models below, net performance loss is remaining directly related fulfilment cost less remaining benefit, while the alternative is the independently established exit payment. Do not subtract the forgone contract revenue a second time from an exit penalty.
Recognise impairment first and avoid duplicate losses
Paragraph 69 requires recognising impairment occurring on assets used in fulfilment before the separate provision. That instruction is not permission to deduct every impairment rupee mechanically from every contract-loss estimate. Rebuild the remaining cost model after the asset review and check what the provision actually includes. Keep the impairment entry and residual contractual-obligation working distinct so the same loss is not recognised in both.
Review changes and retain decision evidence
A legally effective reduction in the exit payment, revised cost evidence or a contract amendment can change the best estimate. Paragraph 59 requires period-end review of provisions. Retain the old estimate, new evidence and reconciliation of the change; do not release a provision merely to achieve a budget result. A general forecast of unprofitable operations still requires a separate contract-obligation analysis before it becomes an onerous-contract provision.
Applicable primary references
ICAI: Ind AS 37, paragraphs 59, 61–69 and 105; direct fulfilment costs and onerous contracts
Six worked illustrations
All facts and amounts below are fictional. Assumptions describe the model, not additional statutory rules.
Illustrative example 1: Performance is the cheaper loss route
Remaining enforceable contract benefits are ₹10,00,000. Directly related fulfilment costs are ₹12,00,000 and the supported alternative exit payment is ₹3,00,000. Net performance loss is ₹2,00,000; the cheaper net route is therefore ₹2,00,000. Assume the prior impairment review identifies no additional asset loss and all other recognition conditions are met.
Illustrative example 2: Exit payment limits the simple model
Benefits are ₹8,00,000, fulfilment costs ₹11,00,000 and enforceable termination payment ₹1,20,000. Net performance loss is ₹3,00,000, but exit costs ₹1,20,000. The model provision is ₹1,20,000. Subtracting the ₹8,00,000 benefit again from the exit payment would compare incompatible alternatives.
Illustrative example 3: Direct allocation changes the conclusion
Benefits are ₹10,00,000, incremental costs ₹9,00,000 and supported directly related equipment-cost allocation ₹2,00,000. Fulfilment cost is ₹11,00,000 and performance loss ₹1,00,000. With an exit payment of ₹1,50,000, the model provision is ₹1,00,000. Looking only at incremental costs would show a misleading ₹1,00,000 margin.
Illustrative example 4: Unrelated overhead is not added automatically
Benefits are ₹10,00,000. Supported directly related fulfilment costs total ₹9,50,000, and a separate ₹1,00,000 corporate overhead allocation is assumed not directly related to fulfilment. The performance route has a ₹50,000 surplus and no onerous-contract provision arises on these facts. Adding that unrelated allocation would falsely produce a ₹50,000 loss.
Illustrative example 5: Cancellation without compensation
An unfulfilled order has expected receipts ₹5,00,000 and future fulfilment costs ₹6,00,000, but it is genuinely cancellable without compensation or other remaining obligation. The performance loss would be ₹1,00,000, while the exit cost is ₹0. No provision arises for this model’s unperformed order. Confirm the absence of enforceable or constructive obligations rather than assuming cancellation is free.
Illustrative example 6: Revised exit evidence changes the best estimate
An existing model has benefits ₹6,00,000, fulfilment costs ₹8,00,000 and a supported exit payment ₹1,50,000, producing a ₹1,50,000 provision. Before the next reporting date, a legally effective amendment reduces the exit payment to ₹90,000, with other assumptions unchanged. The revised provision is ₹90,000 and reduction ₹60,000. Retain amendment evidence and confirm no asset-loss duplication; this is not a forecast-based discretionary release.
Ten-step verification table
| Step | Action | Evidence |
|---|---|---|
| 1 | Confirm the accounting framework and scope | Ind AS applicability and relevant other-standard review. |
| 2 | Identify enforceable remaining obligations | Executed agreement, modifications and legal interpretation. |
| 3 | Separate future operations from contracts | Specific contract register and general-budget reconciliation. |
| 4 | Estimate remaining contract benefits | Supported price, quantity and rights analysis. |
| 5 | Build directly related fulfilment costs | Incremental items and justified allocations under paragraph 68A. |
| 6 | Support the alternative exit cost | Enforceable compensation terms and equivalent net comparison. |
| 7 | Complete the prior asset-impairment review | Assets used in fulfilment and recognised impairment evidence. |
| 8 | Calculate the residual provision | Rebuilt net routes, recognition review and no double count. |
| 9 | Review the reporting-date estimate | New evidence, discounting/materiality and movement working. |
| 10 | Reconcile entries and disclosures | Provision roll-forward, expense and supporting assumptions. |
Sixteen practitioner FAQs
1. Does every forecast loss justify a provision?
Paragraph 63 excludes provisions for future operating losses. Identify a qualifying contractual obligation separately.
2. What makes a contract onerous?
Assess unavoidable costs against expected contract benefits under the standard’s definition and measurement framework.
3. Is the provision always the revenue shortfall against gross costs?
Compare the supported net performance route with the relevant exit compensation, not just one forecast column.
4. Do fulfilment costs mean only cash increments?
Paragraph 68A also includes allocations of other directly related costs.
5. Can equipment depreciation enter the model?
A directly related allocation can enter; support the relevant use and allocation basis.
6. Can any corporate overhead be allocated?
Establish its direct relationship to fulfilment. A mechanical allocation does not establish that relationship.
7. What if cancellation is genuinely free?
Verify the facts and any remaining obligations. A freely cancellable unperformed order can have no provision as illustrated.
8. Should lost revenue be deducted twice on exit?
Compare consistent net alternatives. An exit route that gives up receipts should not be mixed with a second subtraction designed for performance.
9. When is asset impairment reviewed?
Paragraph 69 requires recognising impairment that has occurred on fulfilment assets before the separate provision.
10. Is every impairment amount automatically subtracted from the provision?
No. Rebuild the model and identify actual overlap rather than applying an unsupported universal subtraction.
11. Are the examples discounted?
They assume short settlement periods and no material discounting. Assess the applicable measurement rules where timing is material.
12. Do these calculations determine tax deductions?
No. Tax timing and deductibility require a separate statutory computation.
13. Can a commercial intention amend an exit payment?
Support a legally effective change and its reporting-date effect; an unaccepted proposal is not equivalent evidence.
14. Must provisions be reviewed again?
Paragraph 59 requires a reporting-period-end review and adjustment to the current best estimate.
15. Can a provision be used for unrelated operating costs?
Retain the link to the obligation for which it was recognised, consistent with the standard’s use-of-provisions requirements.
16. What should the final working demonstrate?
The obligation, benefits, direct costs, comparable exit route, prior impairment review and residual best-estimate provision.
Conclusion
Assess onerous contracts using directly related fulfilment costs and the least net exit cost, recognising asset impairment before the separate provision.