FINANCIAL REPORTING & IR

In today’s uncertain geopolitical environment, import tariffs and retaliatory measures are increasingly being used as tools of trade negotiation and protectionism. While their political and economic impacts are well-publicized, the consequences for financial reporting often receive less attention, but can be significant. This article explores how tariffs affect corporate financial statements and what Canadian investor relations professionals should consider.

Why Tariffs Matter for Financial Reporting

Tariffs are essentially taxes imposed on goods imported from other countries. They raise costs for importers and often set off retaliatory tariffs from trading partners. For Canadian businesses that rely on cross-border trade – especially with the United States – these added costs and uncertainties can impact everything from inventory values to asset impairment assessments.

Tariffs don’t just alter the cost structure. They introduce economic uncertainty that can ripple through a company's operations and long-term planning, with real implications on companies’ financial reporting, including their financial statements under International Financial Reporting Standards (IFRS).

Key Financial Reporting Implications

1. Valuing your inventory

One of the first places tariffs show up is in the cost of inventory. IFRS requires inventory to be recorded at the lower of cost and net realizable value (NRV). If tariffs significantly raise the cost of imported goods, but the company can’t pass those costs on to customers, then NRV may be less than cost – triggering a write-down.

For instance, if a manufacturer imports steel subject to a new 25% tariff, its per-unit cost increases. If it can't increase its sale price accordingly, its profit margin shrinks – or disappears altogether – prompting an adjustment in inventory value.

In addition, when the tariff rate increases the cost of the product beyond what a customer is prepared to pay, and there are no other markets to sell those products to, companies must also consider whether the goods become obsolete and write-downs are required.

2. Potential impairment of your non-financial assets

The existence of a tariff can flag the potential for impairment of assets like factories, equipment and intangible assets. Under IAS 36, companies must assess whether there's any indication that an asset might be impaired.

Tariffs might cause:

• A decline in sales or market demand;
• Higher production or operational costs; or
• Delayed or cancelled investment plans.

All of these can reduce expected future cash flows from the assets. Companies must then perform an impairment test to estimate the recoverable amount of the asset. The higher economic risk caused by tariffs could also lead to a higher discount rate, further reducing the recoverable amount and increasing the likelihood of an impairment loss.

3. Customer revenue challenges

Tariffs may affect the enforceability of revenue contracts, especially if customers become unable or unwilling to meet payment obligations. Under IFRS 15, revenue recognition requires a high degree of certainty around collectability.

Tariff-induced uncertainty could mean:

• Reassessing whether existing contracts are still valid;
• Delaying recognition of revenue; or
• Switching from ‘over time’ to ‘point in time’ recognition models.

These considerations could cause material shifts in the timing and amount of revenue recognized, with cascading effects on earnings forecasts and investor communication.

4. Onerous contracts

Increased costs caused by tariffs may turn previously profitable contracts into loss-makers. If fulfilling a contract will now cost more than the economic benefit it brings, it may be considered ‘onerous’ under IAS 37.

For example, a company with a fixed-price sales agreement may find that new tariffs push its input costs above the agreed selling price. In this case, it must recognize a provision for the expected loss – impacting both profit and balance sheet strength.

5. Deferred tax assets

If tariffs reduce taxable income or lead to losses, companies may have to reassess whether they can still recover their deferred tax assets. A future outlook clouded by protectionism and trade barriers might call into question the likelihood of generating enough taxable profit to use these assets, requiring valuation adjustments.

Disclosure and presentation considerations

Transparency is essential. Tariffs can be material, and stakeholders – including investors – need to understand their impact. While IFRS doesn’t allow companies to label costs as ‘extraordinary,’ they can still disclose tariff-related expenses in the notes or income statement, provided this is done consistently and clearly.

For example, a company might disaggregate the cost of sales to highlight tariff-related impacts or provide qualitative disclosure in the management discussion and analysis (MD&A) section.

Scenario planning and judgement

Since tariffs can be imposed, lifted, or escalated with little warning, companies should consider using multiple-scenario models in their forecasts. This approach better captures uncertainty and helps management – and investors – understand the range of possible outcomes.

Auditors and preparers alike are encouraged to be skeptical of overly optimistic assumptions in uncertain environments. If a company claims it can fully offset tariff costs through pricing or efficiency, it must be able to back that up with evidence.

What should Investor Relations professionals do?

Investor relations teams should work closely with finance and accounting departments to ensure:

• transparent communication with investors about tariff risks;
• timely updates to guidance when tariffs affect financial results; and
• clear explanations of any impairments, contract losses, or inventory adjustments in quarterly and annual reports.

They should also monitor developments in trade policy and maintain open lines of communication with analysts and institutional investors who may have concerns.

While the driving factors behind tariffs may lie outside a company’s control, their financial reporting consequences do not. Companies must proactively identify, evaluate and communicate the risks and impacts tariffs can create.

By understanding how tariffs affect areas such as inventory, revenue, impairment and tax, investor relations professionals can help ensure that stakeholders are not only informed – but confident – in the company’s resilience and transparency.

Terry Liu, CPA, is a Partner, and Brian Rajadurai, CPA is a Senior Manager, at KPMG Canada.