(i) An entity has a contract to purchase one million units of gas at 23 paise per unit, giving a contract price of 2,30,000. The current market…

CA Final · Financial Reporting · RTP · May 2026
(i) An entity has a contract to purchase one million units of gas at 23 paise per unit, giving a contract price of 2,30,000. The current market price for a similar contract is 16 paise per unit, giving a price of 1,60,000. The gas will be used to generate electricity, which will be sold at a profit. State whether the contract is onerous. (ii) An entity has a contract to purchase one million units of gas at 23 paise per unit, giving a contract price of 2,30,000. The current market price for a similar contract is 16 paise per unit, giving a price of 1,60,000. The gas will be used to generate electricity. However, the electricity is sold at a loss, and the entity makes an overall operating loss. All of the gas purchased by the entity is used to generate electricity using dedicated assets. The electricity is sold to a wide range of customers. State whether the contract is onerous. (iii) An entity has a contract to purchase one million units of gas at 23 paise per unit, giving a contract price of 2,30,000. The current market price for a similar contract is 16 paise per unit, giving a price of 1,60,000. The gas will be used to generate electricity. However, the entity sells the gas under contract, which it no longer needs, to a third party for 18 paise per unit (5 paise below cost). The entity determines that it would have to pay - 55,000 to exit the purchase contract. State whether the contract is onerous. If the contract is onerous then also state the amount of provision to be made on account of the onerous contract. (iv) In the year ended 31 st March 20X1, an entity has a contract with a third party supplier. The entity wishes to terminate this contract in 20X1-20X2, even though it will still have two years to run, because it can enter into a cheaper contract with a new supplier. It will incur a charge for terminating the contract. Does the entity have to provide in 20X0-20X1 for the contract that it will be exiting in 20X1-20X2?

Suggested Answer and Working Notes:

(i) The economic benefits from the contract include the benefits to the entity of using the gas in its business and because the electricity will be sold at a profit, the contract is not onerous. (ii) The entity first considers whether the assets used to generate electricity are impaired. To the extent that there is still a loss after the assets have been written down, a provision for an onerous contract should be recorded. (iii) The only economic benefit from the purchase contract costing - 2,30,000 are the proceeds from the sales contract, which are - 1,80,000. Therefore, a provision should be made for the onerous element of 50,000, being the lower of the cost of fulfilling the contract and the penalty cost of cancellation (55, 000). (iv) A provision should be recognised only if the contract is onerous. If the goods received under the supply contract are sold at a profit, the contract is not onerous and provision should not be made in the year 20X0-20X1. The termination cost should be recognised as incurred in 20X1-20X2.

Topics: Ind AS 37, Ind AS 23

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