KPMG: What Audit Committees Should Know About Tariffs and Financial Reporting

KPMG has released Tariffs Uncertainty: Ask the right financial reporting questions.  The paper, which KPMG describes as “a briefing prepared for audit committee members,” includes summaries of key areas of financial reporting that tariffs may affect and questions related to each area.  In KPMG’s view, “The financial reporting, accounting, and disclosure obligations posed by the current geopolitical, macro-economic and risk landscape -- including tariffs uncertainty -- are a top priority and major undertaking for audit committees in 2025.”

The paper begins by emphasizing the pervasive impact of tariffs on financial reporting:

“Both revenue and cost of goods sold may be affected, and contract modifications can involve either suppliers or customers. Assets may be impaired, debt arrangements may be modified and covenant relief may be sought. In some cases, there may be doubt about a company's ability to continue as a going concern. And strategic decisions may give rise to restructuring and asset disposals.”

KPMG also observes that “Every business implication of tariffs uncertainty – throughout the value chain – has a ripple effect on the company’s financial reporting.” 

KPMG’s discussion focuses on nine areas in which tariffs may have financial reporting impacts.  For each area, KPMG discusses the potential financial reporting issues and the related business considerations. Below are these nine areas, along with a summary of the financial reporting implications KPMG describes in each area and a sample of the questions that KPMG recommends audit committees consider.

Inventory costs and impairment risk.

Tariffs incurred to import an inventory asset increase the item’s cost basis. Inventory is impaired if its cost (including tariff costs) exceeds its realizable value or market value.

• What are the judgments and risks involved in the tariff positions and strategies taken by the company?

• How will product margins be affected by tariffs?

• Can and will selling prices be raised on affected products?

• Does the company have firm purchase commitments?

The myriad effects on revenue.

Tariff-related increases in sales prices increase revenue, while the tariffs increase cost of sales. Tariffs cannot be netted against revenue, even if shown on the customer’s invoice. Increased selling prices, as well as the overall macroeconomic environment, may increase collection risk, which may in turn affect the amount and timing of revenue recognition.

• Does the company have an enforceable right to pass along the cost of tariffs to customers?

• Is there price concession or collectability risk?

• What are the effects of tariffs on over-time or long-term revenue contracts?

• Is accounting for new contracts appropriately considering the changes to selling prices, costs, and customer behavior?

Contract modifications as a response.

A contractual modification to increase customer prices “generally results in prospective revenue recognition if the future goods are 'distinct' - even if the contract states that the customer is paying for previously incurred tariffs.” If the future goods are not distinct, a contractual modification that increases the customer's price may be recognized “on a cumulative catch-up basis.”

• Is legal counsel involved in evaluating the contractual rights related to price changes?

• Has the company recognized the benefits of price changes based on estimates before there is an enforceable right?

• Has the company allocated the benefits to the appropriate sales/purchases?

Projected financial information sensitivity.

Projected cash flows are critical to many accounting models. Two areas that rely on cash flow projections to determine market-based valuation are nonfinancial asset impairment testing and going concern assessment.

• Have secondary impacts on the company’s planned tariffs response been considered?

• Has a sensitivity analysis been performed to assess the range of possible outcomes?

• What is the level of documentation of assumptions and significant judgments?

Impairment testing essentials.

If tariffs significantly reduce the expected cash flows of a reporting unit, such as because of decreased demand or margin compression, goodwill may be impaired. Intangible assets like customer relationships and trade names may lose value if management expects growth prospects or financial results to decline.

• Are tariff policies disrupting supply or demand for products?

• How have tariffs impacted the company’s suppliers and customers?

• Is financial performance declining or expected to decline?

• Does the company have any development projects impacted by tariffs?

Financing implications.

Debt is modifications, or exchanges for new debt with the same lender, raise accounting complexities. Different accounting models apply to a troubled debt restructuring versus other debt modifications.

• Are debt agreements expected to be modified?

• Has debt covenant compliance been projected under revised forecasts?

• Is additional borrowing or refinancing required to support near-term liquidity?

• Has a sensitivity analysis been performed to assess the level of risk of a going concern issue?

Consequential operational changes.

“Restructuring efforts may give rise to severance obligations, contract termination costs. relocation expenses and other restructuring charges. There are separate accounting requirements for lease reassessments, modifications, and terminations -- as well as specific impairment testing requirements.

Some of these requirements may result in a loss being recognized.”

• Are agreements being terminated early?

• Have plans been made to abandon assets?

• Will changes be made to the company’s workforce?

• Are any assets or businesses being disposed of?

Disclosure matters.

KPMG reports that 94 percent of Form 10-Q filings analyzed between April 1 and June 2 discussed tariff-related matters. These disclosures appeared in MD&A (69 percent), Risk factors (18 percent), Notes to the financial statements (7 percent), and elsewhere in the filing (6 percent).

• Are disclosures about estimation uncertainties and the underlying basis for critical judgments adequate?

• Are disclosures company-specific rather than boilerplate?

• Are there certain risks, which may have previously been discussed hypothetically, that should be framed differently amid tariffs uncertainty?

Risk assessment reminders.

Both management and the auditor need to understand how risks and uncertainties impact the financial reporting process.  

• Which executives are responsible for identifying material financial, liquidity, and operating risks?

• How is management identifying and mitigating these risks?

• Does management have an incident response plan?

Audit Committee Takeaways

As KPMG notes, the financial reporting, accounting, and disclosure issues arising from uncertainty regarding tariffs is a top priority for many audit committees.  KPMG’s paper provides a comprehensive overview of the issues audit committees may need to grapple with in the rapidly changing tariff environment.  KPMG’s suggested questions would be a good starting point for exploring these issues with management.  Audit committees with an interest in this topic may also want to review BDO’s discussion of tariff-related reporting and disclosure issues and suggested questions.  See BDO on Financial Reporting Implications of Tariffs and Questions Audit Committees Should Ask, March-April 2025 Update.