As global trade policies continue to fluctuate, many entities are reviewing how tariffs should be accounted for within their organizations.
Tariffs are amounts owed on goods crossing international borders, generally levied on imports but can occasionally also be placed on certain export products.
Under Generally Accepted Accounting Principles in the United States (U.S. GAAP), inventory on hand should include any tariff expense in the capitalized cost. This follows the same treatment as other costs incurred to acquire an item. As a result, tariff costs incurred should be considered when performing an assessment under the lower of cost or net realizable value (LCNRV) methodology.
Similarly, amounts incurred to pay tariffs should be included in both revenue on products sold and in the cost of goods sold. Tariff costs and revenue should be recorded at gross amounts and not netted together. This accounting methodology should be followed regardless of whether any additional revenue collected as a result of tariffs is shown on invoices to customers or is included within the product fee line. The rationale for this treatment is that U.S. GAAP wants revenue recognition to be consistent and comparable across companies and industries, whether or not companies elect to break these out for their customers. While U.S. GAAP does provide a practical expedient to net taxes collected from customers on behalf of a government, tariffs are excluded from this consideration as the company is not collecting the tariff itself.
Tariffs incurred to obtain long-term assets such as property, plant, and equipment should also be capitalized into the cost to place the asset into service. The capitalized tariff cost should then be considered when assessing future cash flows for any potential asset impairment.
Companies may face new complexities as they navigate through tariff uncertainty. Manufacturers and retailers with large inventory balances, along with capital-intensive businesses, should take time now to assess their accounting policies as changes in global trade policies could make the accounting for tariffs more significant.
Entities following the International Financial Reporting Standards (IFRS) should follow a similar accounting treatment, as the accounting standards under revenue recognition and inventory valuation under U.S. GAAP and IFRS are now largely converged.
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