In the world of business and finance, the term Onerous Contract Deal means a burdensome contract agreement or a burdensome contract. The term relates to efforts to anticipate the occurrence of financial uncertainty and risk of a company that creates obligations to other parties so that in its implementation it needs to be regulated in such a way as to comply with the principles of accounting standards applicable in each country.
By definition the term Onerous Contract Deal or a contract that is burdensome or burdensome is a type of business contract agreement signed by two interested parties where in the implementation process it turns out that what was planned is not in accordance with expectations, causing unavoidable costs to fulfill contract obligations that exceed the economic benefits. to be received from the contract.
In another definition, it is said that what is meant by a Onerous Contract Deal is a mention in accounting terms that refers to a contract that will cost the company more to fulfill than what the company will receive in return.
Meanwhile, according to International Accounting Standards (IAS) the term Onerous Contract Deal or burdensome contract is defined as “a contract in which the unavoidable costs of fulfilling obligations under the contract exceed the economic benefits expected to be received under the contract. The concept of “unavoidable costs” This implies a lower cost to fulfill the contract and any compensation or fines arising from failure to fulfill it.
Based on the classification and definition of the Onerous Contract Deal described above, each type of contract that falls into the category referred to as a burdensome contract needs to be taken seriously by the management of the company because it has serious effects and impacts on changes in the company’s balance sheet reported and affects the perspective of the company. and the decisions of investors and shareholders in assessing financial performance and performance as well as in influencing decision making so that it needs to be regulated in such a way as to refer to the general accounting principles used as generally applicable standards.
The types of contracts described above that pose a risk Onerous Contract Deal or onerous contracts in the United States are governed by generally accepted accounting principles, or GAAP, as set out by the country’s Financial Accounting Standards Board, so it is recommended that companies there follow these standards which require they report onerous contracts in the presentation of the balance sheet financial statements.
Meanwhile, in Indonesia, regulations regarding types of contracts that are burdensome or incur additional costs in treatment are regulated in the Statement of Financial Accounting Standards PSAK 57 par 66 which states that the entity is bound by an onerous contract, then the current obligation under the contract is measured and recognized as a provision or included in the contract. components of liabilities whose timing and amount are uncertain and must be included or recorded in the presentation of the company’s balance sheet for the purposes of transparency, accountability and objectivity of financial statements.
Below, are some agreements that are usually very difficult and arguably detrimental for one of the parties:
One of the parties, for whatever reason it could be due to limited funds to agree to an agreement, of course something like that would be very burdensome.
The terms of the agreement, may be bad for one of the parties and will only benefit one of them.
However, there is something interesting about the Onerous Contract Deal, namely that the agreement can be canceled at any time as long as one of the parties who object to it can fulfill the specified conditions. That is:
After an agreement, but it turns out that the terms are not at all profitable for one of the parties and lead to burdensome losses, it can be canceled. After all, if it’s not canceled, who wants to keep losing and having trouble.
Basically the Onerous Contract Deal, only carried out by 2 parties who have difficult conditions, but they try to solve the problem by working together, but yes, if it only burdens one party, the agreement will eventually be canceled.
Cancellation of the agreement, can also go through the court of law and the court will have consequences if, indeed, the agreement is basically invalid. Consequences apply to both.
Accompanied by related evidence, the aggrieved party will be able to recover the funds from their very detrimental loss.
Accompanied by evidence, the adverse party must compensate the loss level for the injured party, due to an unequal or one-sided agreement.
There are several signs, which are signs of the Onerous Contract Deal. That is:
The first party, informs the second party about the related situation and deliberately wants to take advantage of it for profit.
Transactions are only carried out by the injured party, so the benefiting party does not have any transactions.
Occurs, because there is an urgent problem and must be resolved by both parties. Can be from independent, company and others, depending on the source of the problem.
When a Onerous Contract Deal is identified, the organization must recognize the net obligations associated with it as accrued liabilities and offset expenses in the financial statements, This must be done as soon as the loss is anticipated.
Onerous Contract Deals can occur because of their relationship to the sale of commodities such as GOLD, when the market price drops below the costs required to acquire, mine, or produce the commodity. Another example of a burdensome contract is when the lessee is still required to make payments under the terms of the operating lease. , but no longer use the asset, the amount of remaining lease payments, less offsetting rent out income, is considered the amount of the liability to be recognized as a loss.
A case in point of the Onerous Contract Deal is A company signs a 20 year lease for a new corporate headquarters, for $2 million in rental payments per year, Shortly thereafter, it relinquishes most of its division during a major downsizing and no longer takes up about 90% of the space floor in the head office building, Even though it doesn’t need it, the company is obliged to continue to make rental payments until the end of the lease term, Another example of Onerous Contract Deal is a business that has signed a contract to lease a plot of land and equipment to mine GOLD commodities, But the decline in the price of GOLD does not mean Onerous Contract Deal costs are lower With the decline in prices of GOLD commodities, however, this still refers to the business of selling as previously agreed.
For the fees to be paid in the Onerous Contract Deal, the company will usually consider the following:
A. Direct labor (i.e., salaries and wages of employees directly involved in manufacturing and shipping)
B. Direct materials (e.g., inventories used to fulfill contracts)
C. Costs directly related to contract activities (e.g., contract management, depreciation of tools and equipment, etc.)
D. Costs you incur simply because you entered into a contract (i.e., subcontractor payments)