Impact of tariffs on financial reporting and disclosure
Impact of tariffs on financial reporting and disclosure
The past five years have delivered a global health pandemic, wars, and economic uncertainty, all of which present numerous accounting challenges. Recently announced tariffs by the United States of America are sparking a trade war, with retaliatory tariffs expected from other nations. These are expected to introduce even more complexity and uncertainty to the accounting for a wide range of transactions and events.
What you need to know
Our recent bulletin summarises nine key areas to consider when determining how tariffs may affect your organisation.
We discuss each topic briefly below.
Impairment of non-financial assets
Tariffs can trigger impairment indicators due to increased input costs, reduced demand and inflation-related cost pressures, especially affecting the recoverable amounts of goodwill, property, plant and equipment, right-of-use assets and intangible assets. Value-in-use calculations should consider multiple scenarios and higher discount rates to reflect the greater uncertainty in cash flows due to tariffs.
Our bulletin answers your FAQs, such as:
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FAQ #1 |
If an entity does not export a significant amount of goods or services subject to tariffs and is also minimally affected by rising import costs, could impairment indicators still be present? |
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FAQ #2 |
If tariffs have not been enacted by the reporting date, can they be ignored in the value-in-use calculation if there is an expectation that tariffs may be introduced after the reporting date? |
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FAQ #3 |
If tariffs have been enacted by the reporting date, do entities need to assume they will endure for the remaining useful life of the asset? |
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FAQ #4 |
Can entities make assumptions about changes to their operations in response to tariff policies? |
Some entities may be required to write down goodwill and will not be able to subsequently reverse that impairment if circumstances improve in subsequent periods.
Fair value measurement
Key points to note here are:
- Fair value measurements will be affected by tariff announcements, with Level 3 valuations being particularly sensitive.
- Entities will have to consider whether market participants pricing of assets would assume that enacted tariffs will endure over the long-term.
- Given rising tariffs, many organisations may be thinking about, but not yet committed to, restructuring their business. While restructuring assumptions can be included in determining fair value less costs of disposal, they cannot be included in value-in-use models.
Discount rates
With tariff uncertainty, the potential for high inflation and a general economic downturn, entities should revisit whether discount rates used to calculate value-in-use, employee benefit provisions, incremental borrowing rates for leases, provisions and share-based payments are still appropriate. Errors in inflation treatment (real vs. nominal) can lead to material misstatements.
Going concern assessments
Companies in tariff-impacted sectors may struggle with liquidity, customer demand and complying with loan covenants. Scenario testing, stress testing, and disclosures are critical. Our bulletin provides examples of disclosures about an entity’s going concern assessment.
Judgements, estimates and estimation uncertainty
Due to tariff-induced reductions in demand for goods or services and increased input costs, entities may need to revise assumptions used in impairment assessments, fair value measurements, accounting for deferred taxes, employee benefits, inventory valuation, assessment of control/joint control, contingent consideration, and more.
Our bulletin sets out what regulators expect to see entities doing when making significant judgements and estimates, as well as some example disclosures.
Events after the reporting period
Assessing events that occur after the end of the report until the financial statements are authorised for issue is even more critical during times of uncertainty and rapid change. This is because there is an increased risk that a material event will occur during this period.
Entities should continually monitor and assess events that occur after the reporting date to ensure that material post-balance date events have been appropriately adjusted or disclosed in the financial statements. FAQ #2 is important because it discusses tariffs enacted after the reporting date and how uncertainty about future economic conditions should be considered in your impairment tests.
Financial instruments
Here we highlight the Expected Credit Loss (ECL) models, with rising tariffs potentially affecting certain industries and jurisdictions more than others. Enhanced disclosures are needed about sector-specific drivers in ECL measurement and risk concentrations related to specific sectors and/or jurisdictions.
FAQ #12 also notes that increased tariffs may impact the effectiveness of hedging relationships if forecasted transactions are no longer highly likely.
Other reporting effects
Our bulletin discusses how tariffs can impact the classification of borrowings as current or non-current and the accounting for deferred tax assets, share-based payments, revenue from contracts with customers, leases, government grants and provisions. Additionally, FAQ #10 looks at whether tariffs paid to import goods are included in the cost of inventories under IAS 2 Inventories.
Interim financial reporting
In addition to all the recognition and measurement issues mentioned in this article, entities preparing interim financial reports in accordance with IAS 34 Interim Financial Reporting must also disclose details about significant transactions and events that have occurred since the end of the last annual reporting period. New or expected tariff announcements mean substantial additional disclosure in interim financial reports.
An unfortunate consequence of the current tariff environment is that some entities may be required to write down goodwill in an interim period and will not be able to subsequently reverse that impairment if circumstances improve in the second half of the year.
More information
Please refer to our bulletin for more information about how tariffs may impact your financial statements.
Need help?
Accounting in times of uncertainty is complex, subjective and requires significant estimation and judgement. Our team of IFRS & Corporate reporting experts is here to help.