The Global Tariff Tango: How to Keep Your Financials in Step with Today’s Trade Policies

Cost-to-cost method impacts

Companies that recognize revenue over time using the cost-to-cost input method — common in industries like construction, aerospace, defense, and engineering services — are especially vulnerable to changes in input costs driven by tariffs.

• As tariff-related expenses increase the estimated total cost to complete a contract, the percentage of completion (actual costs incurred ÷ total estimated costs) decreases. This results in deferring revenue recognition in the current period.
  
  
• If the cost inflation is severe enough, the contract may turn loss-making — which, under ASC 606 (and formerly ASC 605-35-25), requires immediate recognition of the full anticipated loss in the income statement.
  
  
• These dynamics may also affect bonus or incentive clauses, which are often tied to milestones or margin thresholds that now become harder to achieve.

Standalone selling price (SSP) reassessments

Tariffs can trigger the need to reassess standalone selling prices (SSP), especially in bundled arrangements where goods and services are sold together but priced separately. For instance, if tariffs increase the cost of a hardware component in a hardware-plus-installation bundle, the relative SSP allocation may need to be updated. This reallocation can shift revenue between performance obligations, impacting both the timing of revenue recognition and associated gross margins.

Contract modifications 

Tariffs often lead to customer price renegotiations, especially for long-term or fixed-price contracts. These changes may take different accounting forms under ASC 606:

• If tariff-related pricing changes are accompanied by added or revised scope, the arrangement may qualify as a contract modification under ASC 606, requiring either retrospective reallocation across existing and remaining performance obligations or treatment as a separate contract if the new goods or services are distinct and priced at their standalone selling prices (SSP).
  
  
• When pricing changes stem from tariff clauses or future cost variability, they may be accounted for as variable consideration, requiring constraint evaluation to limit revenue recognition until reversal is unlikely and ongoing re-measurement as tariff exposure changes over time.

Gross vs. net presentation

Under ASC 606, tariffs are not classified as sales taxes, meaning companies cannot apply the practical expedient that allows certain taxes to be excluded from revenue.

• When a company pays tariffs and passes that cost on to customers, the amount is included in revenue, not netted against cost of sales.
  
  
• This results in grossed-up revenue and cost figures, which can distort gross margin metrics and other key performance indicators — even when overall economics remain unchanged.

Capitalization of tariffs

Under ASC 330, import tariffs are treated as a cost directly attributable to bringing inventory to its present location and condition. This means they must be capitalized along with freight, handling, and other acquisition-related costs — not expensed as incurred. As a result:

• Higher tariff rates lead to higher recorded inventory balances, which can distort trends in working capital and artificially inflate total assets.
  
  
• Many companies, in an effort to hedge against rising tariffs or mitigate future disruptions, may accelerate inventory purchases — contributing to slower turnover cycles.
  
  
• Slower-moving inventory increases carrying costs (e.g., warehousing, insurance, handling) and raises the risk of obsolescence, especially in industries with rapid product innovation or seasonal demand patterns.

Risk of impairment 

As tariff costs swell inventory balances, companies must evaluate whether the net realizable value (NRV) of inventory still exceeds its capitalized cost — or risk triggering an impairment under the lower of cost or NRV model. Scenarios that increase impairment risk include:

• Slow-moving products - Inventory that turns slowly or sits idle due to shifting customer preferences or product cycles is more susceptible to markdowns or liquidation pricing.
  
  
• Market-constrained selling prices - Even if acquisition costs rise, companies may be unable to pass those increases on to customers — particularly in highly competitive markets or amid inflationary pressure — resulting in negative margin products.
  
  
• Weakened consumer demand due to price increases - If tariffs drive prices too high, demand may drop off, leading to unsold inventory buildup, returns, or the need for promotional discounts — all of which lower NRV.

Long-lived assets

Under ASC 360, companies must evaluate whether long-lived asset groups — such as property, plant, equipment, leasehold improvements, or capitalized internal-use software — are recoverable if indicators of impairment exist. Tariffs can directly contribute to those indicators by diminishing expected cash flows and altering operating assumptions.

• Tariff-driven cost increases can compress margins and reduce projected cash inflows, particularly for manufacturing facilities or product lines dependent on tariff-affected supply chains — a key indicator that long-lived asset recoverability may be at risk.
  
  
• If the sum of undiscounted future cash flows falls below the carrying amount of an asset group, ASC 360 requires the company to proceed to a fair value assessment — signaling a potential impairment scenario.
  
  
• When the estimated fair value is lower than the carrying amount, the resulting difference must be recorded as a partial or full impairment loss — often triggered by the inability to pass tariff costs to customers or reduced capacity utilization.

Goodwill & indefinite-lived intangible assets

Goodwill and indefinite-lived intangibles are tested for impairment at least annually, or more frequently if triggering events occur — such as market disruptions or cost structure changes that could impact fair value. Tariff-related changes can create exactly that kind of trigger.

• If a reporting unit’s cost structure becomes permanently inflated due to tariff exposure, especially relative to better-positioned competitors, its relative value may decline — increasing the risk of goodwill impairment.
  
  
• Tariff-related revenue volatility, reduced sales volumes, or margin compression can undermine the assumptions used in goodwill impairment testing, potentially lowering the reporting unit’s fair value below its carrying amount and triggering an impairment charge.

Fair value measurements

When an impairment test under ASC 360 or ASC 350 requires a fair value estimate, companies often rely on discounted cash flow (DCF) models under ASC 820. Tariffs introduce new complexity into those models — and elevate the need for defensible assumptions.

• Tariff-related operational and geopolitical uncertainty may warrant higher discount rates in fair value models, reflecting the elevated risk profile and reducing the present value of future cash flows in impairment testing.
  
  
• Companies are increasingly adopting scenario-based cash flow modeling that incorporates probability-weighted outcomes across different tariff environments (e.g., 10%, 25%, or rollback scenarios), providing a more accurate and supportable fair value estimate under ASC 820.

Deferred tax assets & valuation allowances

Tariffs can put pressure on a company’s bottom line — and that pressure often flows through to deferred tax asset realizability.

• Tariffs that increase cost of sales or compress gross margins can lead to reduced pre-tax book income, making it harder for companies to demonstrate the ability to utilize deferred tax assets (DTAs), such as net operating losses or tax credits.
  
  
• Under ASC 740, if it’s more likely than not that some portion of a DTA won’t be realized, a valuation allowance is required. Tariff-related margin erosion and weakened forecasts — especially in high-import industries — may warrant a fresh look at whether existing DTAs remain supportable.
  
  
• Companies that rely on long-range projections to support DTA realizability must reassess whether those assumptions still hold in a tariff-inflated environment. If forecasted taxable income is no longer reliable, DTAs may be overstated on the balance sheet.

Transfer pricing considerations

Tariffs often force companies to reconfigure supply chains — moving production, changing suppliers, or restructuring intercompany transactions — all of which raise important tax and compliance questions.

• If a U.S. entity begins absorbing tariff costs that were previously borne elsewhere in the supply chain, the company may need to adjust its intercompany transfer pricing arrangements to ensure they continue to reflect arm’s-length economics and comply with applicable tax regulations.
  
  
• Tariff-driven shifts in supply chain operations or entity-level profitability may require companies to reassess their uncertain tax positions, particularly if new transfer pricing structures reflect more aggressive interpretations of functions, risks, or asset ownership.
  
  
• Material changes in intercompany profit allocations resulting from tariff-related restructuring can draw heightened scrutiny from tax authorities, especially if documentation doesn’t clearly support the revised economic rationale or demonstrate that local entities are still bearing appropriate levels of risk and reward.

Global minimum tax considerations (Pillar Two)

Tariffs also have implications under the OECD’s Pillar Two global minimum tax regime, which requires multinational enterprises to maintain a 15% effective tax rate in each jurisdiction. Rising input costs from tariffs can reduce local profitability and push effective tax rates below the threshold, potentially triggering top-up tax liabilities — especially in low-tax jurisdictions. 

Companies must reassess how tariff costs are allocated across entities, particularly in complex structures with contract manufacturers or shared services, where flow-through is less clear. These changes may also affect book-tax timing differences, requiring updates to deferred tax asset and liability recognition.

Risks & uncertainties

Under ASC 275, companies must disclose known risks and uncertainties that could significantly affect estimates used in preparing financial statements — especially when it’s reasonably possible those estimates will change in the near term.

In a tariff environment, that could include:

• Inventory valuation assumptions, particularly if costs are rising due to tariffs but selling prices remain fixed
  
  
• Pricing assumptions, including estimates around cost pass-through, promotional activity, or price sensitivity
  
  
• Customer relationships – e.g. the risk of key account demand declining due to price increases or sourcing changes

These disclosures should describe the nature of the uncertainty, how it could affect financial results, and which areas of the financials are most exposed. Boilerplate language won't cut it — companies should tailor disclosures to reflect the specific risks tariffs pose to their business model and reporting areas.

Subsequent events

ASC 855 governs the treatment of events occurring after the balance sheet date but before the issuance of financial statements. In the context of tariffs, this could include:

• New tariff announcements
• Rate increases or rollbacks
• Government retaliation or trade agreement changes

If these events provide evidence of conditions that existed at the balance sheet date, they may require recognition in the financials (Type I events). If not, they may still warrant disclosure as non-recognized subsequent events (Type II), particularly if the new developments could influence investor or stakeholder decisions.

Even when tariffs don’t materially change current-period balances, transparency around evolving trade risks helps set expectations and demonstrates proactive management oversight.

SEC Considerations: Risk factors, MD&A, and forward-looking information

For public companies, tariffs must be evaluated within the context of SEC reporting obligations — especially when they materially affect performance, strategy, or financial outlook.

• Risk factors - Disclose exposure to trade policy shifts, tariff-related cost pressure, supply chain dependency, or geopolitical uncertainty. These should be tailored, detailed, and updated regularly as the trade landscape evolves.
  
  
• MD&A - Disclose how tariffs are impacting gross margin trends, overall operating results, liquidity, capital expenditures, and sourcing or procurement strategies, while also outlining management’s mitigation responses — such as supplier diversification, pricing adjustments, or contract renegotiations.
  
  
• Forward-looking information - Consider how potential future tariff actions — or policy shifts under different political administrations — could impact financial performance, and what actions management is taking to prepare.

Contract cancellation or customer losses

If key customers cancel or delay orders due to price increases or delivery uncertainty, expected revenues may fall short, threatening the company’s ability to cover fixed costs and near-term obligations.

Margin erosion 

Sustained tariff impacts can compress gross margins to the point where operational profitability becomes unsustainable — especially when companies lack pricing power or have fixed-price contracts that can’t be quickly renegotiated.

Difficulty sourcing materials or alternatives 

If critical inputs become cost-prohibitive, delayed, or unavailable due to trade restrictions, and viable alternatives aren’t immediately accessible, operations may grind to a halt — creating both liquidity issues and reputational risk with customers.

Cashflow delays or working capital strain

Higher inventory costs, elongated supply chains, or reduced sales velocity can all lead to cash flow pressure. If cash collections slow down or working capital needs unexpectedly spike, the company may be unable to service debt, pay vendors, or meet payroll obligations in the near term.

Elevate Tariff Strategy to a Governance-Level Priority

Tariffs are reshaping trade policy at a scale not seen in decades, and companies must treat them as part of enterprise risk management — not just a procurement issue. Boards should challenge management to present a clear, well-vetted tariff strategy: What alternatives were considered? What assumptions underpin the plan? How will it adapt as policy changes? This strategy should be reviewed regularly and integrated into broader financial and operational planning.

Make Scenario Planning an Ongoing Discipline

Tariff rates, affected product categories, and geopolitical stances can all shift rapidly — making static planning obsolete. Leading companies are building flexible models that incorporate best-, base-, and worst-case tariff outcomes. These models should estimate financial impact across cost of goods sold, margin profiles, sourcing structures, and even customer behavior. Boards should ensure there’s a cadence of review and that the company is prepared to act on its playbooks — not just develop them.

Balance Forecasting Needs with Execution Capacity

Finance teams are under pressure to model constant trade scenarios while managing the day-to-day needs of the business. This can stretch resources thin and delay decision-making. Boards and executive leaders should ensure the finance function is adequately staffed and supported, so forecasting doesn’t come at the expense of closing the books, managing liquidity, or delivering on transformation initiatives. It’s not enough to plan for uncertainty — companies must also be able to operate effectively in it.

Reinforce Tariff Compliance Processes

Beyond strategy, tariffs carry real compliance risk. Incorrect tariff classifications or failure to monitor updates from U.S. Customs and global trade authorities can lead to costly fines and audit complications. Companies should routinely validate their classifications, review intercompany pricing structures, and update invoicing practices to ensure tariff costs are properly reflected. Compliance should be embedded in operational workflows, not treated as a one-off exercise.

Integrate Currency and Inflation Impacts into Planning

Tariff policy and macroeconomic trends are closely linked. A weakening U.S. dollar, for instance, may increase the cost of imported goods and trigger inflationary pressure — further impacting demand and pricing flexibility. Management should incorporate FX scenarios and inflation trends into their tariff response plans, adjusting capital deployment, pricing strategies, and tax planning accordingly. Boards should also assess how these variables might influence long-term consumer behavior and business model sustainability.

Rethink M&A Strategy Through a Trade Lens

Tariff uncertainty is reshaping deal flow. Buyers are pressing pause between LOI and close to better understand cost exposures, working capital volatility, and margin risk. Meanwhile, well-positioned companies are using M&A to gain scale and supply chain leverage. Boards and deal teams should view transactions not just as growth plays, but as opportunities to build resilience — particularly through acquisitions that diversify supplier bases or improve operational flexibility.

Turn Disruption into Competitive Advantage

While tariffs can squeeze margins, they also create room for strategic differentiation. Companies that respond quickly — whether by repricing dynamically, reengineering sourcing, or increasing product value — can emerge stronger than peers who delay. Boards should push management to explore how trade disruption might reveal new growth avenues, cost-efficiency gains, or customer loyalty drivers. In volatile environments, the companies that thrive are often the ones that lean in early and adapt fast.