Section 5.3: Onerous Groups of Contracts (Ian The Intern example)

guillam76guillam76
in CIA.IFRS17-LRC

I'm sorry as this represents a topic that receives repeated questions - but I'm really confused with the FCF signs and I am having a hard time finding the "right, most up to date" forum post on that.

When we look at the decision tree, we state that if FCF > LRC excl. LC, the contract is onerous. If we state that the contracts are onerous, to me it conceptually means that we expect to have more incoming outflows than what we initially planned for (so, the current LRC) and I therefore conclude that the formula here for FCF = [Future cash out-flows + RA - Future cash in-flows - effect of discounting]. Is this assessment correct?

However, if positions were reversed and I'm given FCF & LRC and I have to determine whether the contracts are onerous. I'm really unsure as to what the signs should be for FCF and how I should classify these contracts.

Thanks!

Comments

  • grahamgraham

    Apologies for the delay. We are looking into your question.

  • Staff-T1Staff-T1

    "When we look at the decision tree, we state that if FCF > LRC excl. LC, the contract is onerous. If we state that the contracts are onerous, to me it conceptually means that we expect to have more incoming outflows than what we initially planned for (so, the current LRC) and I therefore conclude that the formula here for FCF = [Future cash out-flows + RA - Future cash in-flows - effect of discounting]." Yes this is a correct assessment.

    For your second question, you should take LRC - FCF. A positive LRC excl LC represents a liability owing and so does a positive FCF. The LRC ex is a simplification or approximation to the underlying FCF. If it is more conservative than the underlying, then it is fine to proceed. If it is not, then you are onerous

  • guillam76guillam76

    Got it, thank you!!

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