What defines an onerous contract?

An onerous contract is defined as one in which the unavoidable costs to fulfill the contract exceed the expected economic benefits that will be received from it. This situation typically arises when a business is obligated to fulfill a contract that has become unprofitable, leading to a loss when considering the costs required to execute the contract versus the revenues that are expected to be generated.

In this context, the key aspect is the comparison between the costs required to perform the contract and the benefits expected. If the costs surpass the benefits, the contract is classified as onerous, requiring the entity to recognize a provision in its financial statements reflecting the loss anticipated from the contract.

In contrast, the other options do not capture the essence of what constitutes an onerous contract. A contract with expected economic benefits exceeding the costs would be beneficial, not onerous. Similarly, a contract where financial benefits are guaranteed would also be seen as favorable, not onerous. Finally, a contract that can be exited without costs does not fit the definition of onerous, as there would be no obligation that leads to a loss due to unfulfilled costs exceeding benefits.