ÀÖÓ㣨Leyu£©ÌåÓý¹ÙÍø

Financial reporting considerations

Contract modifications and price changes

If a price change to an existing contract is negotiated with a customer, it is evaluated as a contract modification.Ìý When the only change in the contract terms is price, the price change is accounted for either prospectively (if the goods and services are distinct) or on a cumulative catch-up basis (if the remaining goods or services are not distinct).

If a price adjustment is contemplated in the terms of an enforceable contract, a company should assess whether it represents variable consideration or a contract modification. If the price change relates to a future contract, it is simply considered in the accounting for that contract.

ÀÖÓ㣨Leyu£©ÌåÓý¹ÙÍø Handbook,ÌýEconomic disruption

• Section 2.5, Contract modificationsÌý

ÀÖÓ㣨Leyu£©ÌåÓý¹ÙÍø Handbook,ÌýRevenue recognition

• Chapter 11, Contract modifications

Estimates and judgments

Key estimates and judgments in the revenue recognition process may be affected and therefore may need to be reassessed. Potential effects include::

• Variable consideration, such as price concessions or rebates, which may require revenue to be constrained.
• Allocation of considerationÌýâ€� standalone selling prices may need to be updated.
• Measures of progressÌýcould be affected by supply chain or workforce disruptions leading to cost changes or project delays as well as increases to total forecasted costs due to tariffs.

ÀÖÓ㣨Leyu£©ÌåÓý¹ÙÍø Handbook,ÌýEconomic disruption

• Section 2.2, Variable consideration
• Section 2.6, Standalone selling pricesÌý

ÀÖÓ㣨Leyu£©ÌåÓý¹ÙÍø Handbook,ÌýRevenue recognitionÌý

• Section 3.4, Price concessions
• Section 5.3, Variable consideration
• Section 7.4, Measuring progress toward complete satisfaction of a performance obligation

Collectibility

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If, at contract inception, a customer’s creditworthiness is such that the collectibility threshold is not met (i.e. it is not probable that the company will collect substantially all of the consideration to which it expects to be entitled), a contract does not exist and the general revenue model cannot be applied.Ìý

After contract inception, companies need to evaluate whether significant changes in credit risk have occurred and, if so, reevaluate the collectibility criterion for existing contracts. If, on reassessment, it is determined that collectibility is no longer probable, use of the general revenue model should be discontinued. Previously recognized revenue is not reversed and the alternative (deposit) model is applied.

ÀÖÓ㣨Leyu£©ÌåÓý¹ÙÍø Handbook,ÌýEconomic disruption

• Section 2.4, Assessing collectibility, receivables and contract assets

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ÀÖÓ㣨Leyu£©ÌåÓý¹ÙÍø Handbook,ÌýRevenue recognitionÌýÌýÌý

• Section 5.2, Elements of transaction price

Financial reporting considerationsÌý

Capitalization of tariffs

Tariffs are capitalized if incurred in procuring the goods required to bring the inventory to its existing condition and location � e.g. inbound to the manufacturing facility or fulfillment center.

ÀÖÓ㣨Leyu£©ÌåÓý¹ÙÍø Handbook,ÌýInventory

• Question 3.2.20, Are tariffs and other import fees included in the cost of inventory?Ìý

ÀÖÓ㣨Leyu£©ÌåÓý¹ÙÍø Handbook,ÌýEconomic disruption

• Section 4.3, Inventoriable costs - Tariffs

Net realizable value (NRV) / impairment assessment

Tariffs and related cost increases can lead to higher inventory costs without corresponding increases in selling prices. If these costs cause the inventory’s carrying amount to exceed its net realizable value, an impairment loss may result.Ìý

For inventories measured at lower of cost or market, determining replacement cost may require additional time, effort and judgment due to supply chain disruptions and price volatility.Ìý

If inventory has been stockpiled to avoid tariffs, it should be monitored for obsolescence or other signs of impairment.

ÀÖÓ㣨Leyu£©ÌåÓý¹ÙÍø Handbook,ÌýEconomic disruption

• Section 4.4, Impairment

Purchase commitments

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Companies with firm purchase commitments should assess whether those agreements will result in aÌýlossÌýthat needs to be recognized.ÌýIf there are firm sales contracts for the future inventory, the pricing of those contracts including ability to pass on the cost of tariffs should be considered.

ÀÖÓ㣨Leyu£©ÌåÓý¹ÙÍø Handbook,ÌýEconomic disruption

• Section 4.5, Purchase commitmentsÌý

ÀÖÓ㣨Leyu£©ÌåÓý¹ÙÍø Handbook,ÌýInventory

• Question 4.6.20, Are losses as a result of firm purchase commitments evaluated similarly to on-hand inventory?Ìý

Normal production levels

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If production falls outside the range of normal capacity, companies may need to adjust how costs are allocated to inventory. If production is abnormally high, the fixed overhead allocated to each unit of production is reduced.Ìý

If production is abnormally low, no adjustments are made to the fixed overhead allocations, and unallocated overhead is expensed in the period incurred.Ìý

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ÀÖÓ㣨Leyu£©ÌåÓý¹ÙÍø Handbook,ÌýEconomic disruption

• Section 4.3, Inventoriable costs â€� Normal production levels

ÀÖÓ㣨Leyu£©ÌåÓý¹ÙÍø Handbook,ÌýInventory

• Question 3.2.110, How are fixed and variable production overhead costs allocated to inventory?
• Question 3.2.120, Are unallocated fixed overhead and other abnormal costs capitalized in the cost of inventory?ÌýÌý

Financial reporting considerationsÌý

Indicators of ImpairmentÌý

The effects of evolving tariffs policies on certain industries or markets may lead to an impairment triggering event. This may occur, for example, due to permanent or temporary curtailment of operations, reduced customer demand or supply chain disruptions.Ìý

Companies should assess whether triggering events indicate that the carrying amount of long-lived assets may not be recoverable or when an event or circumstance indicates that it is more likely than not that goodwill or indefinite-lived intangible assets are impaired.

ÀÖÓ㣨Leyu£©ÌåÓý¹ÙÍø Handbook,ÌýEconomic disruption

• Section 5.2, Triggering events
• Section 6.2.10, Long-lived asset impairment

ÀÖÓ㣨Leyu£©ÌåÓý¹ÙÍø Handbook,ÌýImpairment of nonfinancial assets

• Section 4.3, Trigger-based testing

Sequence of Impairment Testing

When impairment indicators are present, companies may need to test multiple asset classes. This is done in a specific order:

1. Assets outside the scope of ASC 350/360Ìý(e.g. inventory)
2. Indefinite-lived intangible assets
3. Long-lived assets
4. Goodwill.

ÀÖÓ㣨Leyu£©ÌåÓý¹ÙÍø Handbook,ÌýEconomic disruption

• 6.2.50, Sequence of impairment testing

ÀÖÓ㣨Leyu£©ÌåÓý¹ÙÍø Handbook,ÌýImpairment of nonfinancial assets

• Question 4.4.10, In what order are assets tested for impairment?
• Question 4.4.20, Does the impairment of goodwill trigger impairment testing for the long-lived assets in that reporting unit?

Projected financial informationÌý

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If a quantitative impairment test is required, companies may need to revise key assumptions in their financial projections, including sales growth, supply costs, tariff costs and capital spending. In some cases it may be more appropriate to use probability-weighted cash flow projections given the uncertainty and evolving trade environment.Ìý

As part of the valuation analysis, companies should consider a market participant or investor view in determining which, and to what extent, tariffs and other measures should be reflected in the valuation analysis.Ìý

ÀÖÓ㣨Leyu£©ÌåÓý¹ÙÍø Handbook,ÌýImpairment of nonfinancial assets

• Question 7.2.30, Are cash flows based on a single best estimate or probability-weighted?
• Question 8.3.210, If an entity expects conditions after the measurement date to change, does it reflect that expectation in measuring fair value?

ÀÖÓ㣨Leyu£©ÌåÓý¹ÙÍø newsletter,ÌýTariffs and valuationÌý

• Three steps to assess rapidly changing policies and environments

ÀÖÓ㣨Leyu£©ÌåÓý¹ÙÍø Handbook,ÌýEconomic disruption

• Section 5.5, Quantitative assessment

Disposals and plans to abandon assetsÌý

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In response to evolving regulatory and economic pressures, companies may adopt various strategic measures, including asset disposals or operational shifts. When disposals are part of the strategy, the criteria for classification as held-for-sale are evaluated to determine whether the assets qualify for presentation as discontinued operations.

If a company commits to a plan to abandon a long-lived asset, it accelerates its depreciation or amortization. However, a long-lived asset that is temporarily idled is not considered abandoned and should continue to be depreciated over its remaining useful life.
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ÀÖÓ㣨Leyu£©ÌåÓý¹ÙÍø Handbook,ÌýEconomic disruption

• Section 6.2.40, Abandoned and idled assets
• Section 10.2, Disposals

ÀÖÓ㣨Leyu£©ÌåÓý¹ÙÍø Handbook,ÌýDiscontinued operations & HFS disposal groups

• Section 4.2, Disposed of by sale (held-for-sale criteria)
• Question 4.3.30, Can a temporary idled long-lived asset be considered abandoned?Ìý

Financial reporting considerationsÌý

Lease modifications and terminations

Relocation or other business considerations may require modifying or terminating existing lease agreements. A lessor and lessee may also agree to other changes to a lease (e.g. shortening the lease term or extending the lease term in return for reduced rent in the near term).ÌýÌý

A lease modification is any change to the terms and conditions of a lease that results in a change in its scope or consideration. The accounting for lease modifications should be approached carefully as their accounting effects can vary widely.

ÀÖÓ㣨Leyu£©ÌåÓý¹ÙÍø Handbook,ÌýEconomic disruptionÌý

• Section 6.3.10, Lessee considerations
• Section 6.3.20, Lessor considerations

ÀÖÓ㣨Leyu£©ÌåÓý¹ÙÍø Handbook,ÌýLeases

• Section 6.7, Lease modifications (lessee)
• Section 6.8, Lease terminations (lessee)
• Section 7.6, Lease modifications (lessor)

Reassessment of lease terms

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Tariff-driven actions may trigger a requirement to reassess the term of the lease or an option to purchase the underlying asset â€� for example, if the lessee elects not to exercise an option that it had previously determined it was reasonably certain to exercise.Ìý

The expected residual value of an underlying asset may be affected by market disruption, requiring reassessment of the amount it is probable that the lessee will owe under a residual value guarantee.

ÀÖÓ㣨Leyu£©ÌåÓý¹ÙÍø Handbook,ÌýEconomic disruption

• Section 6.3.10, Lessee considerations â€� Lessee reassessments

ÀÖÓ㣨Leyu£©ÌåÓý¹ÙÍø Handbook,ÌýLeases

• Section 6.6, Lease reassessments (lessee)

Impairment or abandonment of ROU assets

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Refer to the Goodwill and long-lived assets considerations above.Ìý

If a lessee has both the intent and practical ability to sublease the underlying asset, further evaluation should be performed related to reassessment of asset groupings.Ìý

ÀÖÓ㣨Leyu£©ÌåÓý¹ÙÍø Handbook,ÌýLeasesÌý

• Section 6.5.2, Interaction with Topic 360 when asset will be abandoned or subleas
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CollectibilityÌý

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Lessors should evaluate whether tariffs have adversely affected the financial condition of lessees, potentially affecting the collectibility of lease payments.Ìý

The accounting implications vary depending on the type of lease (i.e. sales-type, direct financing or operating) and whether collectability is assessed as not probable at lease commencement or becomes not probable subsequently.Ìý Ìý
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ÀÖÓ㣨Leyu£©ÌåÓý¹ÙÍø Handbook,ÌýEconomic disruptionÌý

• Section 6.3.20, Lessor considerations â€� Lessor revenue recognition â€� collectibility

ÀÖÓ㣨Leyu£©ÌåÓý¹ÙÍø Handbook,ÌýLeasesÌý

• Section 7.5, Collectibility (lessor)

Financial reporting considerationsÌý

Restructuring

Tariffs and related cost pressures may prompt companies to restructure operations, potentially leading to exit activities such as severance, contract termination costs, and expenses to consolidate or relocate facilities and workforce.Ìý

Companies should evaluate:Ìý

• whether these activities result in recognition of termination benefits; and
• the appropriate timing of recognition and disclosure in the financial statements.

ÀÖÓ㣨Leyu£©ÌåÓý¹ÙÍø Handbook,ÌýEconomic disruption

• Section 8.3.10, Termination benefits

ÀÖÓ㣨Leyu£©ÌåÓý¹ÙÍø Handbook,ÌýEmployee benefits

• Chapter 4, Termination benefits and other nonretirement postemployment benefits

Financial reporting considerationsÌý

Going concern

Companies may face liquidity challenges if they are not able to sufficiently increase selling prices to offset tariffs or due to decreased customer demand.Ìý

Given the uncertainty around the timing and amount of the tariffs, relying on past experience to establish future expectations may not be appropriate. It may also be difficult to establish the probability of a plan’s future success when critical elements of the plan depend on events outside management’s control (e.g. availability of credit lines or obtaining other financing).

ÀÖÓ㣨Leyu£©ÌåÓý¹ÙÍø Handbook,ÌýEconomic disruption

• Section 10.4, Going concern

ÀÖÓ㣨Leyu£©ÌåÓý¹ÙÍø Handbook,ÌýGoing concernÌý

• Chapter 3, Step 1: Assess whether substantial doubt is raised
• ChapterÌý3, Step 2: Assess whether substantial doubt exists

Financial reporting considerationsÌý

Loan modifications and credit impairment (lenders)

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Changes in the macroeconomic environment may affect borrowersâ€� ability to meet obligations, leading to an increase in the allowance for expected credit losses.Ìý

Lenders may also need to consider the accounting for loan modifications and whether there are transfers between categories of debt securities.

ÀÖÓ㣨Leyu£©ÌåÓý¹ÙÍø Handbook,ÌýEconomic disruption

• Section 3.2, Credit impairment
• Section 3.3, Loan modifications â€� lender
• Section 3.4, Transfers between categories of debt securities

ÀÖÓ㣨Leyu£©ÌåÓý¹ÙÍø Handbook,ÌýCredit impairment

Debt classification and covenant compliance (borrowers)

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Borrowers should consider whether tariff-related disruptions affect debt covenant compliance, potentially requiring reclassification of debt from noncurrent to current.Ìý

Borrowers may need to consider the accounting for debt modifications, including whether a debt modification constitutes a troubled debt restructuring (TDR), debt modification or debt extinguishment (debt modification that results in the recognition of a new loan).

ÀÖÓ㣨Leyu£©ÌåÓý¹ÙÍø Handbook,ÌýEconomic disruptionÌý

• Section 7.2.30, Debt covenants
• Section 7.3, Debt modification

ÀÖÓ㣨Leyu£©ÌåÓý¹ÙÍø Handbook,ÌýDebt and equity financing

• Chapter 4, TDR, debt modifications and extinguishments

Derivatives and hedging

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Tariff-related economic disruption may affect whether a financial instrument or other contract is required to be accounted for as a derivative or whether the criteria to qualify for hedge accounting continue to be met.Ìý

ÀÖÓ㣨Leyu£©ÌåÓý¹ÙÍø Handbook,ÌýEconomic disruption

• Section 3.5, Derivatives and hedge accountingÌý
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ÀÖÓ㣨Leyu£©ÌåÓý¹ÙÍø Handbook,ÌýEconomic disruptionÌý

• Section 3.6.20 Equity securities without a readily determinable fair value when measurement alternative is elected
  

Financial reporting considerationsÌý

Risks and uncertainties

Companies are required to disclose risks and uncertainties that could significantly affect the amounts reported in the financial statements in the near term or the near-term functioning of the company. Tariffs may represent such a risk and uncertainty, for example, if they affect supply chains, pricing strategies or customer demand.Ìý

ÀÖÓ㣨Leyu£©ÌåÓý¹ÙÍø Handbook,ÌýEconomic disruptionÌý

• Section 10.5, Risks and uncertaintiesÌý

ÀÖÓ㣨Leyu£©ÌåÓý¹ÙÍø Handbook,ÌýFinancial statement presentation

• Chapter 7, Risks and uncertainties