Tariffs are nothing new, but recent executive actions have changed their scale
In late October 2025, the American Institute of CPAs (AICPA) released a report examining how recent tariff activity could impact financial reporting. While no accounting standards have changed, the AICPA warns us that the rise in tariff-related transactions could increase reporting complexity, particularly when it comes to inventory valuation and revenue recognition.
Before we dive into the report, let’s review what’s happened with tariffs in the last 12 months.
2025 marked one of the largest and most complex tariff escalations in decades. Shortly after taking office, President Trump imposed broad tariffs on some of the US’s largest trading partners, including China, Mexico, and Canada — who quickly responded with retaliatory measures. In the months that followed, the US expanded its tariff program to assess reciprocal tariffs on additional trading partners, broadening the impact across the US economy — and, indeed, the global economy.[1] Businesses were left navigating temporary exemptions, delayed effective dates, renegotiated rates, and ongoing legal challenges.
With this context, let’s review the AICPA’s framework for applying existing accounting guidance to the current tariff environment.
Under US GAAP, inventory costs should include all amounts to bring an item to its existing location and condition. This generally includes tariffs. While some may be tempted to classify tariffs as “abnormal costs” to avoid capitalization, the AICPA cautions against this treatment. As the AICPA notes, “tariffs, while perhaps being unanticipated, are a normal or routine supply chain cost.”
When tariffs are being challenged in court, businesses must determine whether potential refunds should be reflected in their financial statements. Right now, several lower courts have ruled that the President’s tariffs exceeded executive authority, but the US Supreme Court verdict is still outstanding.[2]
This raises a key question: How should businesses account for tariff costs that are currently required to be paid but may ultimately be refunded?
There is no GAAP guidance that directly addresses contested tariffs, but there is some other guidance that we can apply to this scenario. Ultimately, this is a question of how to account for loss recoveries.
The AICPA says that Accounting Standards Codification (ASC) 410-30 — which covers environmental obligations — is often applied to other types of loss recoveries. Under ASC 410-30, if a claim is subject to litigation, recovery is generally presumed improbable unless strong evidence suggests otherwise. Following this logic, the AICPA cautions against assuming a tariff refund is probable. The AICPA’s stance would be to wait until the courts issue a final verdict before you consider the loss to be recoverable.
As tariff activity has increased, businesses have looked to pass some or all of those costs on to customers. But calculating tariff costs is often easier said than done. Tariffs may be incurred directly on imports, through freight carriers, or indirectly through supplier price increases, making it difficult to quantify and justify price increases to customers.
Although pricing decisions and related customer discussions can be challenging, there’s a bigger issue at hand: When can those shared costs be recognized as revenue?
Under ASC 606, businesses should recognize revenue only when the customer is legally obligated to pay under an enforceable contract. This means that tariff-related price increases can be recognized as revenue only if the contract explicitly allows the business to pass tariff costs onto the customer. In these situations, the right to these “recoveries” is enforceable and is often accounted for as a form of variable consideration.
If the contract does not permit tariff-related price increases, additional amounts generally cannot be recognized as revenue — even if the customer has already paid them or verbally agreed to reimburse the costs. In these cases, a contract modification — like a change order — is needed to create enforceable rights and obligations. Only after the modification occurs can those amounts be recognized as revenue.
Given the scale, volatility, and uncertainty surrounding tariffs, businesses may need to expand their financial statement disclosures. These disclosures should help users better understand how tariffs affect business operations and their outlook for the future. New or expanded disclosures should cover the following:
Tariffs may not have changed financial reporting, but they have certainly changed how we think about it. As tariffs play a bigger role in pricing and purchasing decisions, businesses must carefully document their judgments and remain more transparent than ever. If you’d like to discuss how tariffs may affect your financial reporting, contact us today.
[1] https://www.bbc.com/news/articles/czejp3gep63o
[2] https://www.reuters.com/legal/government/supreme-court-set-issue-rulings-with-trump-tariffs-case-still-pending-2026-01-14/