Comment on Exposure Draft ED/2018/2 - Onerous Contracts - Cost of Fulfilling a Contract - Proposed amendments to IAS 37

The Israel Accounting Standard Board provided comments on the proposed amendments to IAS 37 in Exposure Draft ED/2018/2. The comments raised concerns about the contradiction with IAS 37's model and the measurement unit for assessing whether a contract is onerous.

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March 21st 2019
International Accounting Standards Board
7 Westferry Circus
Canary Wharf
London E14 4HD
United Kingdom
Dear IASB members,
Exposure Draft ED/2018/2 – Onerous Contracts – Cost of Fulfilling a Contract – Proposed
amendments to IAS 37
The Israel Accounting Standard Board welcomes the opportunity to comment on the IASB's
Exposure Draft, ED/2018/2,Onerous Contracts – Cost of Fulfilling a Contract– Proposed
amendmentsto IAS 37. This letter sets out the viewsthat were raisedin the Israel
Accounting Standards Board's discussion.
Please find below our detailed comments for question 1 raised in the ED:

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Contradiction with IAS 37's model
As noted in the Exposure Draft's Basis for Conclusion, contracts that were in the scope of IA
11 are in the scope of IFRS 15 since annual reporting periods beginning on or after 1 Januar
2018. IAS 11's model for onerous contract was that if it is probable that total contract costs
will exceed total contract revenue, the expected loss shall be recognised as an exp
immediately. IAS 11's model was for construction contracts only and was different from the
general model in IAS 37.
IFRS 15 does not include requirements for identifying, recognising and measuring onerous
contracts. Instead, an entity is required to apply IAS 37 to assess whether a contra
which it applies IFRS 15 is onerous.
We believe that the amendment of paragraph 68 of IAS 37 that states that the cos
fulfilling a contract comprises all the costs that relate directly to the contract contradicts th
model in IAS 37.
According to the current model in IAS 37, an entity has an onerous contract and recognises
loss only if the unavoidable costs of meeting the obligations under the contract exceed the
economic benefits expected to be received under it. In other words, a rationale decision of
an entity would be to enter a contract only if the contract's revenue would be equ
exceed theincremental costs of the contract. Under the current model in IAS 37, there is a
prohibition to recognise future operating losses.
However, according to the proposed amendment, all the costs that relate directly to
contract should be considered. Those costs include fixed costs (such as wages of ce
employees or allocations of costs that relate directly to contract activities). Including those
costs in the determination of the loss arising from an onerous contract, results in recognisin
certain future operating losses, which is prohibited under IAS 37. For example, if an entity
expects future operating losses resulting from wages of certain employees and assets whic
are redundant, IAS 37 prohibits the recognition of those future operating losses. However, i
that entity would enter into a contract that will require the work of those employees and
would use those assets, the entity could recognise future losses arising from the wages of
those employees, as a result of the proposed amendment.
The Board proposes to specify in paragraph 68 of IAS 37 that the cost of fulfilling a contract
comprises the costs that relate directly to the contract (rather than only the incremental costs of
the contract). The reasons for the Board’s decisions are explained in paragraphs BC16–BC28.
Do you agree that paragraph 68 of IAS 37 should specify that the cost of fulfilling a contract
comprises the costs that relate directly to the contract? If not, why not, and what alternative do
you propose?
Question 1

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Measurement Unit
IAS 37 (paragraph 66) prescribes that if an entity hasa contract that is onerous, the present
obligation under the contract shall be recognised and measured as a provision.
IFRS 15 (paragraph 17) requires an entity to combine two or more contracts entered into at
or near the same time with the same customer and account for the contracts as a
contract if certain criteria are met.
We believe that a clarification is required within the proposed amendment in order to make
clear that the measurement unit for assessing whether a contract is onerous would be the
combined contracts under IFRS 15, rather than each contract separately.
We appreciate the opportunity to provide our comments.
Sincerely,
Dov Sapir, CPA, Chairman
Israel Accounting Standards Board