A provision for onerous contracts is an accounting provision in accordance with HGB that is recognised when a loss is expected on a contract that has not yet been fulfilled because the estimated costs exceed the expected revenue.
The provision for onerous contracts is used to recognise expected losses from pending transactions as a precautionary measure. SAP Business One does not have a separate function for the automated creation of such provisions, but the system does provide all the necessary accounting tools to map them correctly manually. The basis for this is the precise recording and evaluation of Costs and Proceeds at transaction level. The gross profit report can provide early indications of loss-making transactions. The actual provision is realised through a manual journal entry in financial accounting.
Integration into business processes
Provisions for onerous contracts primarily affect financial accounting and are used in particular for project business, fixed-price orders or long-term supply contracts. Critical orders can be identified at an early stage through regular cost controls and contribution margin calculations.
Relevant modules and functions
- Finance: Journal entry, Profit and Loss Account, Gross profit reports
- Project management: Transaction reports by project
- Cost accounting: Cost centre reports
Concrete application examples
- A fixed-price project shows a negative profit in the gross profit report. Contribution margin - A provision for impending losses is recognised.
- A contract provides for deliveries at fixed prices, but purchase prices rise above the agreed level - provision required to cover losses.
Key features/important aspects:
- Part of the statutory provisions in accordance with HGB (Section 249 (1) sentence 1 HGB)
- Manual conversion in SAP Business One via journal entry required
- Requires well-founded cost and revenue control in advance
- Provision amount corresponds to the expected loss
- Not to be confused with deferred income (RAP)
Differentiation from related terms
In contrast to Prepaid expenses and deferred charges (RAP) that relate to deferred expenses or income, the provision for onerous contracts represents a balance sheet equalisation of future losses from contracts that have not yet been fulfilled.
Related terms/cross-references:
Advantages/benefits (optional):
- Increases balance sheet truth and clarity in accordance with HGB
- Early risk detection through transparent cost control
- Legally compliant mapping of potential losses
Best practices/instructions for use (optional):
- Regular gross profit analyses to identify potential losses
- Coordination with tax consultant or auditor on the valuation of provisions
- Documentation of the basis for the decision to recognise provisions
Target group:
Accountant, Controller, CFO, Auditor, Consultant
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