Onerous Contracts in Australia: 2025 Rules, Risks & Reporting

Onerous contracts aren’t just accounting jargon—they represent a real financial threat for Australian businesses in 2025. With the Australian Accounting Standards Board (AASB) tightening definitions and reporting requirements, understanding what qualifies as an onerous contract and how to handle it is critical for compliance, risk management, and financial clarity.

What Is an Onerous Contract?

In simple terms, an onerous contract is one where the unavoidable costs of fulfilling the contract exceed the expected economic benefits. This can happen due to rising supplier prices, fixed-price contracts in a volatile market, or changes in customer demand. The Australian standard AASB 137 outlines specific requirements for recognising and measuring these contracts.

• Unavoidable Costs: The minimum net cost of exiting the contract (either by fulfilling or breaching it).
• Examples: Construction projects hit by material price hikes, long-term service agreements during staff shortages, or fixed supply contracts where input costs have soared.

For 2025, the AASB has aligned more closely with the International Accounting Standards Board (IASB), ensuring consistency for multinationals operating in Australia. This means a renewed focus on early identification and accurate measurement of potential losses.

2025 Policy Updates & Practical Implications

Recent amendments to AASB 137 (effective for annual periods beginning on or after 1 January 2025) require businesses to:

• Identify all contracts where fulfilment costs could exceed benefits, not just where actual losses have occurred.
• Include Direct and Incremental Costs: Assess unavoidable costs by considering both direct costs (materials, labour) and incremental costs (e.g., penalties for breach).
• Make Provisions: Recognise a provision in the balance sheet as soon as a contract is identified as onerous, rather than waiting for actual losses to materialise.

This change has practical consequences. For example, a solar installer locked into 2022 panel prices for a 2025 project may have to recognise a loss upfront if wholesale costs have since surged. The new rules also mean that businesses with large government or infrastructure contracts must be even more vigilant with cost forecasts and contract reviews.

Spotting and Managing Onerous Contracts

Identifying an onerous contract early can save headaches down the line. Here’s how Australian businesses can stay ahead:

1. Regular Contract Reviews: Set up quarterly reviews of all significant contracts, especially in industries exposed to supply chain disruptions or price volatility.
2. Scenario Analysis: Use updated cost forecasts to stress-test existing agreements. For example, construction companies should model the impact of a 10% increase in steel prices on long-term builds.
3. Negotiation & Renegotiation: Where feasible, renegotiate terms with customers or suppliers to include cost escalation clauses or exit options.
4. Provisioning: Ensure your finance team is well-versed in the latest AASB guidance and is actively monitoring for triggers that require provisioning for onerous contracts.

Real-World Example (2025): An Australian civil engineering firm in Victoria recently flagged a $2 million provision on a multi-year roadworks contract. The reason? Labour shortages and a spike in asphalt prices meant fulfilling the contract would cost more than the revenue earned. Thanks to proactive accounting, the firm avoided a nasty end-of-year surprise and maintained trust with shareholders.

Reporting and Transparency: What’s Required?

Transparent disclosure is now a regulatory expectation. In 2025, ASX-listed companies and large private entities are expected to:

• Disclose the nature and amount of provisions for onerous contracts in financial statements.
• Explain the assumptions and calculations behind these provisions, including how costs were estimated.
• Provide narrative on contract risks in management reports, especially if they affect future profitability or cash flow.

Auditors are also under pressure to scrutinise management assumptions and challenge overly optimistic forecasts, making robust internal processes a must.

Conclusion

Onerous contracts are on the radar for regulators, auditors, and investors in 2025. With updated AASB rules, Australian businesses must be proactive in spotting, managing, and reporting these contracts to avoid compliance headaches and protect their bottom line. Stay vigilant, review contracts regularly, and ensure your financial reporting keeps pace with the latest standards.