A closer look: Discussion and analysis of current accounting and reporting issues related to tariffs

Highlights

In 2025, the federal government announced tariffs on goods from a number of countries, intended to reduce the United States’ reliance on imports and increase domestic production.

On April 2, 2025, President Trump announced multiple “reciprocal tariffs”, including a 10% base- line tariff on imports from all countries, and significantly higher percentage rates on specific countries (including China, Japan, and the E.U.) that have trade surpluses with the United States and on certain industries (including automobiles, aluminum and steel). In addition, there were previously enacted tariffs in effect on certain countries and goods.

In response, many foreign governments imposed tariffs and other measures on goods they import from the United States. For U.S. companies that acquire their raw materials or finished goods, or rely on manufacturing, from countries where tariffs are being imposed, there could be a significant impact on their operations and financial results. Companies may have to make changes to their business fundamentals, including downsizing of personnel, closing locations, lease-versus-buy decisions, and changing vendor relationships or renegotiating payment terms.

Tariffs can have a negative impact for entities in many industries, by increasing the cost of imported materials and goods, affecting labor sources, reducing gross margins, and potentially decreasing customer demand and revenues. In response, companies need to consider whether they can pass the full costs of tariffs on to their customers by raising prices (but potentially hurting sales), or change their pricing or discount policies to address some of the tariff impacts. They may also have exposure to foreign currency risks depending on where they get their products, what their contracts say about exchange rates, and how they normally manage currency risks. Cash flows can be negatively impacted as a result, and companies may need to address both liquidity issues in the short-term and longer-term financing needs.

The significant volume of recent tariff revisions in a short period of time, with more changes to come, has created volatility and instability in global stock and bond markets and has the potential to increase inflation. Federal decisions and additional actions are still occurring, with the timing unclear, and stock and bond markets have been rising and falling significantly almost daily in response. The tariffs and overall uncertainty in the economy are impacting many industries and products, and certain sectors are likely to take a significant hit.

Not all companies have experience in responding to these types of challenges or have the resources to evaluate tariff implications and make fundamental business changes in response. Their supply chains and customer relationships may have been established for years, and they may not be able to make real-time changes or absorb the immediate financial impacts.

There have not been any changes in accounting or reporting standards by regulators in direct response to new tariffs. However, the operating environment has changed significantly for companies in all industries, and new decisions about tariffs could significantly change companies’ financial position and results of operations and, as a result, the information provided in financial statements and public company SEC filings.

Accounting and reporting Issues

Existing accounting standards address the issues at hand, including asset valuation, liability recognition, revenue and expense recognition, and related financial statement disclosures. Current SEC regulations and staff guidance address required disclosures by public companies in SEC filings about the business, risks, commitments and contingencies, and discussion of current operations and forward-looking disclosures in Management’s Discussion and Analysis of Results of Operations and Financial Condition (MD&A).

The following topics are those where accounting and reporting could most likely be impacted by tariffs. Many of these issues are interrelated. They are not a list of all potential accounting and reporting considerations, and they are intended to highlight key issues rather than cover each topic in detail. Companies should discuss potential issues now and revisit them as the tariff and overall economic landscape change, with participation by finance, operations, legal, and compliance departments.

Inventory (ASC 330)

Tariffs directly incurred in acquiring goods held in inventory will increase companies’ costs of inventory and, as a result, cost of goods sold, which could drive down gross margins to the ex- tent higher costs cannot be passed on to customers. Inventory balances need to be evaluated for impairment at each balance sheet date based on the lower of cost or net realizable value (NRV), and higher inventory costs due to tariffs may result in increased risk of impairment. If increases in prices are possible, the NRV may be higher and offset the increased cost.

If there are increases in pricing and potential lower demand as a result of new tariffs, companies may find themselves having obsolete inventory that is subject to impairment review. There is also the potential for inventory shortages from existing suppliers that can impact the ability to fulfill contracts, along with the effect of reciprocal tariffs on exported goods, both of which have the potential to negatively affect customer demand, revenues, and operating results.

Long-lived and intangible assets, including goodwill (ASC 350 and 360)

The imposition of tariffs that materially affect future cash flows can be an event that indicates that long-lived assets or intangibles, including goodwill, may be impaired. The impairment assessment is based on fair value, and it is done at the asset group level for long-lived tangible and finite-lived intangible assets and at the reporting unit for indefinite-lived intangible assets, including goodwill.

For property, plant, and equipment, if tariffs result in higher costs and changes in customer demand, companies may make decisions to change where they operate their facilities, or the level of output at a location. These decisions may impact carrying values of their fixed assets and require an impairment evaluation based on the fair value of the assets. This applies both to assets in service and assets under construction. Useful lives may need to be reevaluated for depreciation purposes.

Income taxes (ASC 740)

If new tariffs are expected to have a negative long-term effect on a company’s operations, they may affect the amount of valuation allowance and evaluation of whether deferred tax assets are realizable based on a “more likely than not” analysis considering all positive and negative evidence available. Also, any asset impairment recognized could have implications for deferred taxes.

Debt (ASC 470)

Financial ratios (e.g., EBITDA, working capital) included in covenants in existing debt obligations may be violated because of the financial effects of tariffs. As a result, it may be necessary to seek waivers or renegotiate covenants with lenders to avoid negative outcomes, including cash penalties; accelerated repayment terms and reclassification of the debt to current liabilities; potential shortening of the amortization period for unamortized premiums, discounts or issue costs on the debt; and higher interest rates. Covenant breaches can affect an entity’s liquidity and going concern evaluation.

Revenue recognition (ASC 606)

The accounting for revenues from contracts with customers can be impacted by tariffs. The “transaction price” under ASC 606 reflects the amount the entity expects to collect from the customer, and tariffs may increase that amount.

There can be potential changes to contract terms, including transaction prices. If contracts are modified, they need to be re-evaluated to determine whether the there is a new contact or a continuation of an existing contract. Price changes resulting from tariffs are accounted for like other price changes according to the guidance in ASC 606. They may be variable consideration included in the transaction price, or treated as a contract modification (accounted for prospectively or on a cumulative catch-up basis). They may also be evaluated as part of future contracts depending on the terms of the contracts.

Because new tariffs can result in additional costs to be included in the total estimated contract cost, there are considerations for contracts where revenue for performance obligations is recognized over time using a cost-to-cost input method of progress. There are also potential issues related to whether the profitability of the original contract has changed because of the tariffs, and whether the contract is now a potential loss contract that must be recognized in the current period.

Financial statement disclosures required by ASC 606 should be reviewed to determine whether changes are necessary. They must include required information about the nature, amount, timing, and uncertainty of revenue and cash flows, including significant judgments and changes in judgments made in applying the guidance, including those related to timing of satisfaction of performance obligations and those used in determining the transaction price.

Hedging (ASC 815)

Companies with hedging instruments in place will need to evaluate the impact of higher costs from tariffs on the accounting for those hedges and also consider whether they need to modify those hedges to achieve their objectives. Areas to be assessed, among others, include effectiveness of existing hedging relationships, whether there have been changes in the likelihood of forecasted transactions, negative changes in the markets related to the hedge, and changes in the credit risk of the counterparties.

Accounting estimates and risks and uncertainties (ASC 275)

Financial statement disclosures must include areas where significant estimates and assumptions about future events were used. The expected impact of new tariffs at the date of the financial statements may require this disclosure, depending on a company’s circumstances. If revenues and costs have changed or are expected to change significantly

because of tariffs, models used to develop accounting estimates in areas like fair values, net realizable values, and revenue recognition could be affected. Disclosure should include areas where, based on information available before the financial statements are issued or available to be issued, there is a reasonable possibility that estimates made will change in the near term and the effect of the change will be material.

Another required disclosure is current vulnerability due to concentrations that exist at the date of the financial statements, are reasonably possible to occur, and expose the entity to risk of a near-term severe impact. Changes in the tariff landscape, along with volatility in the economy overall, may require these additional disclosures now or in the future. An example of a concentration is if all of a company’s imports come from a country with new, higher tariffs on its exports.

There are additional required GAAP disclosures relating to uncertainties and contingencies in ASC 450.

For SEC registrants, specific risks and uncertainties are required to be discussed based on Regulation S-K Item 105. Also, in MD&A, per Regulation S-K Item 303, there should be

discussion, including forward-looking information, about effects of federal decisions on tariffs that had, or reasonably possibly could have, an impact on financial condition, results of operations, and cash flows.

Going concern (ASC 205-40)

Entities may have to evaluate their ability to continue as a going concern if conditions and events, considered in the aggregate, raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date the financial statements are issued or available to be issued. Both direct and indirect effects of tariffs on cash flows, working capital (receivables, payables, inventory), overall financial position, budgets, and projections may need to be considered. For companies who have liquidity issues, interest rate levels and availability of capital can also affect their ability to continue as a going concern. The going concern assessment includes tariffs imposed after the balance sheet date.

Companies are required to include disclosures about their assessment and management’s plans to address and mitigate going concern uncertainties. There are specific audit requirements related to management’s going concern assessment and conclusions in AU-C 570 and PCAOB AS 2415.

Subsequent events (ASC 855)
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There are two types of subsequent events: those that provide evidence about conditions that existed at the date of the balance sheet (recognized), and those conditions that did not exist at the date of the balance sheet (non-recognized). Events that occur after the balance sheet date but before the financial statements are issued or available to be issued must be considered for disclosure, even if they are not required to be recognized in the financial statements.

Because of the current dynamics of tariff decisions, developments within the U.S. federal government and other countries should be monitored and evaluated. Depending on an entity’s reporting period-end, the April 2025 tariffs may not have resulted in financial statement recognition or disclosure initially. However, the need for disclosures may change, and non-recognized subsequent events may require recognition in subsequent reporting periods.

Conclusion

Given the extent of potential financial statement exposure resulting from tariffs, it is critical to spend significant time now to understand how tariffs may impact your financial reporting activities. A comprehensive review of the accounting and reporting issues related to tariffs can help ensure compliance for period-end reporting. Entities should continue to monitor government and regulatory developments as global tariff policies continue to evolve, to be aware of and ready to respond quickly to the potential accounting and financial reporting implications.