Either An entity has 100 employees, who are each entitled to five working days of paid sick leaves for each year. Unused sick leave may be carried…

Either At 31st March, 20X1, the average unused entitlement is two days per employee. The entity expects, on the basis of experience that is expected to continue, that 92 employees will take no more than five days of paid sick leaves in 20X1-20X2 and that the remaining eight employees will take an average of six and a half days each. The entity expects that it will pay an additional twelve days of sick pay as a result of the unused entitlement that has accumulated at 31st March, 20X1 (one and a half days each, for eight employees). Therefore, the entity would recognize a liability equal to twelve days of sick pay. OR Ind AS 37 “Provisions, Contingent Liabilities and Contingent Assets" defines 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. Paragraph 68 of Ind AS 37 states that the unavoidable costs under a contract reflect 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 fulfill it. In the instant case, cost of fulfilling the contract is 0.5 million (2.5 million - 2 million) and cost of exiting from the contract by paying penalty is 0.25 million. In accordance with the above reproduced paragraph, it is an onerous contract as cost of meeting the contract exceeds the economic benefits. Therefore, the provision should be recognised at the best estimate of the unavoidable cost, which is lower of the cost of fulfilling it and any compensation or penalties arising from failure to fulfill it, i.e., at 0.25 million (lower of 0.25 million and - 0.5 million).