The term “unavoidable costs” has a specific meaning for accounting purposes. The IASB explains it as “the lower of the cost of fulfilling the contract and any compensation or penalties arising from failure to fulfill it.” However in May 2020 IASB issued amendments to IAS 37 regarding Onerous contracts – Cost of Fulfilling a contract.
The new IAS 37 paragraph 68A reads as follows:
The cost of fulfilling a contract comprises the costs that relate directly to the contract. Costs that relate directly to a contract consist of both:
- the incremental costs of fulfilling that contract—for example, direct labour and materials; and
- an allocation of other costs that relate directly to fulfilling contracts—for example, an allocation of the depreciation charge for an item of property, plant and equipment used in fulfilling that contract among others.
The amendment is applied to financial statements prospective (i.e. in new financial statements only)