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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.
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.