Canada’s IFRS Accounting Standards Discussion Group recently discussed some financial reporting considerations relating to tariffs.

The discussion seems to have been almost as long and tortuous as the tariff saga itself, but somewhat more productive. Among much else, the group noted that the imposition of tariffs and related uncertainties at the reporting date may trigger an impairment test. You’ll recall that an asset or a CGU is impaired when its recoverable amount, being the higher of its fair value less costs of disposal (FVLCD) and its value in use (VIU), is less than its carrying value: the tariff situation may make both those calculations complex. The group noted among other things:

• In developing benchmark discount rates, it will be important for an entity to carefully consider an appropriate peer population. This may be influenced by the degree to which an entity expects the tariffs to affect it and whether it has as much flexibility as other entities to respond to the tariffs (e.g., an ability to shift production and/or sell to other markets).
• When using a modelling approach with multiple probability-weighted cash flow scenarios, it may be reasonable for an entity to contemplate scenarios where existing tariffs are adjusted or removed (even without a precise sunset date). Similarly, it may be reasonable for an entity to contemplate scenarios that include additional tariffs and retaliatory measures that have been proposed but have not yet been put in place.

The report also notes: “Due to the evolving environment and the rapid pace at which tariffs are imposed or changed, an entity may need to be more vigilant in monitoring changes to the tariff landscape and macroeconomic factors to determine whether a new impairment indicator exists at the reporting period end that may not have existed previously, and whether the entity needs to conduct an impairment test.”

Tariffs may also impact the assessment of whether a contract has become onerous: “For example, if a purchase contract with a minimum threshold requires the purchaser to pay a substantial tariff, the contract could become loss-making if an entity’s selling prices cannot sufficiently absorb the tariff and the entity cannot increase its selling prices enough. Even absent a minimum purchase requirement, an entity’s input costs could increase because of tariffs on its direct imports or imports occurring elsewhere in its supply chain. Existing fixed price minimum volume sale contracts would need to be assessed to determine whether they have become onerous.”

They also affect the assessment of deferred tax assets: “When sufficient reversing taxable temporary differences are unavailable, recognition of a DTA requires reliable and supportable forecasts of future taxable profits to demonstrate the likelihood of utilization. The tariffs and further uncertainties that exist at the balance sheet date will need to be considered in an entity’s forecast of future taxable profit.” And of course, given the highly fluid nature of the issue, they’re relevant to the assessment of events after the end of the reporting period, for instance: “the enactment of a new tariff after the balance sheet date may be a non-adjusting event; however, it may confirm and/or may further inform how an entity reflected existing uncertainty at the balance sheet date with regards to the proposed tariffs in, for example, impairment testing.”

Is that the whole list, you may ask? It is not! The report also cited, among other things:

• Inventory measurement – Increased costs due to import tariffs may lead to write-downs of inventory to net realizable value.
• Restructuring – Uncertainties and associated disruptions to traditional trade routes could lead to restructuring activities.
• Revenue recognition – Entities may need to carefully evaluate contract terms and estimates of variable consideration, and uncertainties may prompt entities to modify or even terminate contracts.
• Expected credit losses – Customers or borrowers (for those entities with lending activities) may be adversely affected by the tariffs, which could impact their ability to pay amounts due and could trigger impairment losses.
• Classification of debt with covenants as short term or long term – Entities may no longer comply with covenants because of the current environment, which may lead to reclassification of debt to short term or additional disclosure requirements.

And if an entity is really unlucky, there’s even the issue of going concern uncertainty (although a company hit by more than a few of the above challenges may just decide to give up). More than most issues, one may think this whole discussion stretches the limits of financial statements to the breaking point: to observe that the effect of tariffs “may be challenging to model and will require significant judgment and estimation when developing assumptions” may put things too mildly, given that negotiators continue to flail at the highest level. In such Trump-polluted times, it may be unreasonable to expect preparers and auditors of acutely affected entities to commit to one future scenario over any other (no matter the amount of supporting disclosure): investors might be better served by multiple primary statements reflecting the range of possible outcomes. But as with just about everything Trump-related, the world isn’t ready…

The opinions expressed are solely those of the author.