Brief Definition
Onerous contracts are agreements in which the costs of fulfilling the contract are higher than the benefits received from it. In other words, the contract imposes more financial burden than gain on one of the parties.
Further Explanation
Onerous contracts are agreements in which the costs of fulfilling the contract are higher than the benefits received from it. In other words, the contract imposes more financial burden than gain on one of the parties. These contracts can arise due to changes in market conditions, increased costs, or unexpected difficulties in fulfilling the contract terms. When a contract is identified as onerous, it can have significant accounting and financial implications, as companies may need to recognize a liability for the unavoidable costs.
Example:
A construction company signs a contract to build a bridge for $1 million. However, due to an unexpected increase in the cost of materials and labor, the cost to complete the project rises to $1.2 million. This means the contract is onerous because the company will lose $200,000 by fulfilling it.