A commitment (on an entity- e.g., an Islamic bank) in which the unavoidable costs of meeting the obligations under the commitment exceed the economic benefits that it expects to receive from such a commitment. For example, a bank 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 in a permissible manner. The obligation under the commitment is expected to raise more costs than the economic benefits anticipated to flow through acquisition of the asset.
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.
