As trade tensions and policy shifts continue to reshape global supply chains, tariff updates are creating new accounting considerations for public companies. While tariff changes are driven by political and economic factors, their impact is tangible across the income statement and balance sheet—and requires immediate attention from accounting and finance teams.

This article outlines what tariffs are, how they affect financial reporting, and the concrete steps accounting managers can take to stay compliant, mitigate risk, and preserve margin.

​

🔍 Understanding Tariffs in a Financial Context

Tariffs are import taxes applied at the border, often by product category or country of origin. When a new tariff is implemented or increased, it raises the landed cost of goods brought into the U.S., directly impacting the company’s Cost of Goods Sold (COGS), Inventory, and Gross Margin.

These costs are not taxes in the GAAP sense—they are treated as part of inventory acquisition costs under ASC 330.

 

📊 Accounting Impacts Across the Financial Statements

1. Inventory and COGS Recognition (ASC 330)

When tariffs apply, they must be capitalized as part of inventory costs. This affects the timing of expense recognition.

Example Journal Entry – Upon Purchase of Tariffed Inventory:

​

  Dr. Inventory (Tariff-Inclusive)      $105,000  
      Cr. Accounts Payable                       $105,000

​

When inventory is sold:

  Dr. COGS                                     $105,000  
      Cr. Inventory                                   $105,000

Failing to include the tariff cost here would understate inventory value and overstate margin.

​

2. Segment Reporting & MD&A Disclosures (ASC 280 & SEC Reg S-K)

If only one business unit or geographic region is impacted by tariffs, this creates performance volatility that must be discussed in both segment footnotes and Management Discussion & Analysis.

Best Practice:
Add specific narrative explaining margin fluctuations caused by tariff-driven costs and discuss actions being taken (e.g., supplier changes or pricing adjustments).

​

3. Impact on Deferred Taxes (ASC 740)

In certain situations, tariffs may shift the cost basis of goods sold or affect intercompany transfer pricing, which could create temporary differences between book and tax reporting.

Actionable Step:
Collaborate with the tax team to assess whether additional Deferred Tax Assets (DTAs) or Deferred Tax Liabilities (DTLs) need to be recorded related to the capitalized tariff costs.

​

📌 How Accounting Teams Should Track and Manage Tariff Costs

✅ Implement Detailed Cost Layering in ERP

Create separate cost elements in your ERP system to track tariff-related fees distinct from product or freight costs. This allows more accurate margin analysis and real-time tracking of tariff impact.

​

✅ Update Chart of Accounts if Needed

Consider adding or expanding use of:

• Inventory Clearing or Tariff Holding Accounts

• Customs & Duties Sub-Accounts under COGS

• Cost Variance Accounts for budget-to-actual tracking on tariffed purchases

​

✅ Improve Controls Around SKU Classification

Accurate HS Code classification is essential to apply the correct tariff rate. Partner with trade compliance or legal to validate that item codes are accurate and defensible.

​

💡 Strategic Actions to Offset Tariff Impact

1. Tariff Engineering
   Reclassify products or redesign packaging to fit into lower-tariff categories where legal and feasible.

2. Supply Chain Diversification
   Shift sourcing to trade-favored countries. Even a partial shift can materially reduce exposure.

3. Forward Contracts or Hedge Instruments
   In some industries, using derivatives to hedge foreign purchases may help smooth cost volatility over time.

4. Realign Transfer Pricing
   Coordinate with tax to reassess intercompany markups to reflect tariff-impacted cost structures.

5. Customer Communication & Pricing Models
   Where possible, communicate cost changes and build dynamic pricing models to share tariff burdens with customers.

​

📣 Final Takeaway

Tariffs are more than a trade policy issue—they’re an accounting reality that affects inventory valuation, margin transparency, and financial disclosures. For accounting leaders in public companies, now is the time to sharpen cost tracking systems, reevaluate controls, and partner cross-functionally to manage the financial impact with clarity and compliance.