A commitment for which an entity has to incur unavoidable costs to meet the corresponding contractual obligation in excess of the expected benefits.
For example, an entity may be in a situation where it does not have an asset on its accounts, but is obligated to acquire it under a future commitment. If the obligation under the commitment is expected to create more costs than the economic benefits anticipated to flow through acquisition of the asset, then the entity is said to be currently assuming an onerous commitment- i.e., a loss-laden commitment.
As a remedy for such an onerous commitment, a bank creates a provision for onerous commitment accounting for the expected losses that may arise from respective transactions.
