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Financial reporting amid increasing tariffs and market volatility

Photographic portrait of Victor Chan
Victor Chan

International Director, Global IFRS Services, Ernst & Young Global Limited

5 minute read 17 Apr 2025
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IFRS
Assurance

Many companies affected by the imposition of new tariffs are likely to see impacts to their cost structure and revenue streams.

In brief

  • The recent tariffs and related market volatility, along with their potential impact on profitability, create several financial reporting considerations.
  • Senior management of potentially impacted companies will need to assess the risks tariffs may present to their operations, financial condition and cash flows.

In recent weeks, the United States (US) Government has imposed new tariffs, including reciprocal tariffs on other countries and, in response, a number of affected countries including China and much of Europe have responded with retaliatory tariffs. These tariffs, some of which are subject to change and pauses, impact all of the US’s trading partners to varying degrees. Much uncertainty remains as to the scope, duration, possible exemptions and exclusions, as well as the extent of any retaliatory tariffs imposed on the US by other countries.

While it is generally expected that the impact of higher tariffs and related uncertainties on a company’s revenue and profit margin will be reflected in subsequent reporting periods, those charged with governance and senior management will also need to evaluate whether there are already any accounting consequences, such as indicators of asset impairment, loss, projecting future cash flows, or onerous contracts, in the (interim) financial statements for the current period. It is also important to consider whether appropriate disclosures have been included in these financial statements.

Asset impairment

In IFRS, there is a general standard on asset impairment; the asset impairment assessment is triggered when there is an indicator of impairment. Such indicators can include, among others, significant changes with an adverse effect on the company that will take place in the near future in the market to which an asset is dedicated, as well as situations when the carrying amounts of the net assets of the company are more than its market capitalization. Given the substantially higher tariffs imposed on some countries and the recent sharp volatility in the stock market, companies will need to carefully monitor if any of the impairment indicators exist. When the recoverable amount is lower than the carrying amount of the assets tested, an impairment loss will need to be accounted for.

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Specific items like inventories and financial assets such as trade or other receivables, are subject to impairment considerations in other standards under IFRS. Therefore, the recognition criteria and measurement of the impairment loss across different assets could vary. High quality financial reporting under IFRS would require companies to identify the accounting guidance applicable to each asset subject to impairment evaluation. In particular, companies will need to carefully evaluate to what extent and for how long future cash flows will be affected by higher tariffs under different scenarios and this will likely require significant judgement.

 

The consequences of a volatile macroeconomic environment and the ensuing disruption to the global supply chain system arising from higher tariffs towards an importer or exporter’s financial performance have been widely reported. However, it is important to note that even companies that only produce and sell products domestically could be affected by such measures. For example, overseas suppliers that are effectively shut out from markets with significantly higher tariffs may now need to expand to other accessible markets and, thus, may drive down prices in such markets amid stronger competition. As a result, companies that produce and sell domestically could still face a writedown of their inventories if their net realizable value falls below cost.

Given the significant uncertainties around tariffs globally, measuring the impairment loss, if any, is likely to be subject to significant judgement and estimation. Adequate disclosures are, therefore, important for users to understand the financial performance.

Onerous contracts

Many companies have long-term supply and sales contracts with fixed prices or minimum volume requirements. Additional tariffs and other governmental measures are expected to result in rising costs of production and dampened consumer demand. For example, a supplier significantly impacted by higher tariffs may no longer be able to honour its obligations to its customers. This, in turn, may affect the customer’s capability to fulfil its obligations to its own customers.  

To the extent that a contract does not provide for mechanisms to effectively pass on the impact to the counterparty, it is possible that the unavoidable costs of meeting the obligations under the contract exceed the economic benefits expected to be received under it.

The contract will then be considered onerous and trigger the recognition of a loss provision measured by the present obligation. Before establishing a separate provision for an onerous contract, a company must recognize any impairment loss that has occurred on assets used in fulfilling the contract.

Financial reporting disclosures

Users of financial statements expect robust disclosures by companies to enable them to understand how tariffs and the resulting economic volatility have affected their financial position and performance. In preparing their financial statements, companies also need to consider the expectations and perspectives of regulators.

Disclosure requirements under IFRS for interim financial reporting purposes are less comprehensive and less descriptive than those required for annual financial reporting. However, companies are required to explain events and transactions that are significant to an understanding of the changes in financial position and performance since the previous annual financial statements. For example, when a company records a material impairment loss in the interim period, it will be required to provide appropriate disclosures in the interim financial statements and companies are encouraged to refer to the applicable disclosure requirements for annual financial reporting purposes. Companies are also required to provide an update to the relevant information included in the last annual financial statements. For example, a company may need to disclose any significant reduction in headroom related to goodwill impairment analysis in a subsequent interim period.

Subsequent event considerations

Some governments continue to make announcements on tariffs, retaliatory tariffs and other measures. To the extent such announcements are made after the end of a reporting period, companies will need to carefully evaluate whether they constitute an adjusting or non-adjusting subsequent event.  

The enactment of a new tariff after the end of a reporting period, for example, is generally a non-adjusting subsequent event. However, it may be confirmatory and/or further inform how the company reflects the existing uncertainty at the end of the reporting period with regard to additional threatened tariffs in, for example, impairment testing.

Companies are required to adjust the amounts recognised in their financial statements to reflect adjusting events after the reporting period. In addition, companies are required to disclose the nature of a material non-adjusting event and an estimate of its financial effect (or a statement that such an estimate cannot be made).

Looking forward

As countries are starting to negotiate for lower tariffs, companies will need to carefully monitor any future developments. Companies that are significantly impacted by higher tariffs could be facing a period of uncertainty until such negotiations are concluded. High quality and timely financial reporting together with other means of communication will be essential in keeping investors, lenders and other creditors informed amid market volatility.

Summary

The implications of evolving tariff policies are both wide-ranging and potentially significant. Companies will need to be proactive in identifying and assessing the impact on their operations and updating assumptions used in developing accounting estimates, as necessary, to ensure proper recognition and disclosure of these effects in their financial statements.

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About this article

Photographic portrait of Victor Chan
Victor Chan
International Director, Global IFRS Services, Ernst & Young Global Limited
Develops insights on applying IFRS to emerging accounting issues. Focuses on leases, crypto-assets, investment property and latest standard-setting activities. Enjoys relaxing with family.
Related topics
IFRS
Assurance

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