AASB 137 - Provisions, Contingent Liabilities and Contingent Assets - July 2004
Example 8 An Onerous ContractExample 8 An Onerous Contract
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Example 8 An Onerous Contract
An entity operates profitably from a factory that it has leased under an operating lease. During December 2000, the entity relocates its operations to a new factory. The lease on the old factory continues for the next four years, it cannot be cancelled and the factory cannot be re-let to another user.
Present obligation as a result of a past obligating event – The obligating event is the signing of the lease contract, which gives rise to a legal obligation.
An outflow of resources embodying economic benefits in settlement – When the lease becomes onerous, an outflow of resources embodying economic benefits is probable. (Until the lease becomes onerous, the entity accounts for the lease under AASB 117 Leases).
Conclusion – A provision is recognised for the best estimate of the unavoidable lease payments (see paragraphs 5(c), 14 and 66).