Onerous contracts can arise from purchase commitments of goods or services. The purchase commitments can be purchases of inventories for resale, inventories for own use (such as in manufacturing or construction projects) or capital items (such as property, plant and equipment and investment property) entered into at high prices. Onerous contracts can also arise from unavoidable operating lease payments on premises or equipment.

AASB 137.66 states that if an entity has a contract that is onerous, the present obligation under the contract shall be recognised and measured as a provision.
The standard goes on to define an onerous contract as a contract in which the unavoidable costs of meeting the obligations under the contract exceed the economic benefits expected to be received under it.

The drastic impacts of the Global Financial Crisis may result in many entities having onerous contracts, due to:

• excess vacant lease space because of project cancellations or restructuring/downsizing exercises
• original supplier going out of business and having to source products from alternative suppliers at higher prices
• being locked into unfavourable sales contracts in AUD when production is based overseas
• being forced to enter into very competitive tendering bids.
  

If an onerous contract is identified, a provision must be recognised for the best estimate of the unavoidable costs. AASB 137.68 defines the unavoidable costs under a contract as the least net cost of exiting from the contract, which is the lower of the cost of fulfilling it and any compensation or penalties arising from failure to fulfil it. If the contract is an operating lease, the entity determines the unavoidable cost by reference to the remaining lease rentals payable, reduced by estimated sublease rentals that could be reasonably obtained for the property.