A tariff is a tax imposed on imported goods. In addition to being a source of government revenue, tariffs are often used as a foreign policy tool to shape foreign trade activities or protect certain domestic industries.

Tariff Status Update

The United States has imposed tariffs in one form or another dating back to the colonial era, and prior to the early 1900s, it was the main source of revenue for the U.S. government. But in recent decades, tariffs in the U.S. have remained quite low due to globalization and an effort to promote free trade. President Trump’s sweeping tariff reform will put U.S. tariffs at their highest level in over a century.

President Trump’s imposed tariffs include a 10% duty on all imports worldwide and 25% duties on imported autos, steel, and aluminum. Although currently on pause, some countries are facing the possibility of even higher “reciprocal” tariffs.

The trade war with China is escalating quickly with levies on all Chinese imports now topping 100%, and Beijing promising significant retaliatory tariffs on U.S. goods. Smartphones, computers, and various electronic parts may be exempt from the reciprocal tariffs. Other imported goods, such as pharmaceuticals, semiconductors, and lumber, are also under investigation by the Trump administration for possible tariffs.

Tariffs and Disclosure Obligations

As companies assess the impact of imposed U.S. tariffs and developing global trade wars, it is important to also consider your disclosure obligations.

• Risks and Uncertainties: U.S. GAAP requires that financial statements include disclosure about the risks and uncertainties existing as of the date of the financial statements with respect to:
  • The nature of the reporting entity’s operations
  • The use of estimates in preparing the financial statements
  • Certain significant estimates
  • Current vulnerability related to certain concentrations
  • Ability to continue as a going concern
• Impairment Triggers: U.S. GAAP also requires that long-lived assets be assessed for impairment when triggering events occur, including:
  • A significant decrease in the market price of a long-lived asset
  • A change in the way an asset or asset group is being used or a change in its physical condition
  • An adverse change in legal factors, regulation, or business environment
• For public companies, Regulation S-K also imposes various additional financial reporting requirements in certain SEC filings, including:
  • Risk Factors: Registrants are required to disclose material factors that make an investment in the registrant speculative or risky.
  • Management Discussion & Analysis: Registrants are required to provide a narrative explanation of the financial statements and other statistical data that the registrant believes will enhance a readers’ understanding of its financial condition, changes in financial condition, and results of operations. This includes discussion of material trends and uncertainties related to the registrant’s flexibility in determining when and how to use the available cash flows to satisfy obligations and make other capital expenditures.

SEC Guidance on Business/Market Disruptions

On March 25, 2020, the SEC published CF Disclosure Guidance: Topic No. 9, which provided the Staff’s views on disclosure and other securities law obligations for registrants to consider with respect to the coronavirus disease (COVID-19) and related business and market disruptions.

This guidance contained various questions for registrants to consider with respect to their present and future operations. We believe some of these questions, slightly modified, may be helpful as companies consider their reporting obligations during the current business and market disruptions caused by U.S. tariffs and developing global trade wars:

1. How have tariffs impacted your financial condition and results of operations? In light of changing trends and the overall economic outlook, how do you expect tariffs to impact your future operating results and near- and long-term financial condition? Do you expect that tariffs will impact future operations differently than how it affected the current period?
2. How have tariffs impacted your capital and financial resources, including your overall liquidity position and outlook? Has your cost of or access to capital and funding sources changed, such as revolving credit facilities or other sources, or is it reasonably likely to change? Have your sources or uses of cash otherwise been materially impacted? Is there a material uncertainty about your ongoing ability to meet the covenants of your credit agreements? If a material liquidity deficiency has been identified, what course of action has the company taken or proposed to take to remedy the deficiency?
   
   Consider the requirement to disclose known trends and uncertainties as it relates to your ability to service your debt or other financial obligations, access the debt markets, including commercial paper or other short-term financing arrangements, maturity mismatches between borrowing sources and the assets funded by those sources, changes in terms requested by counterparties, changes in the valuation of collateral, and counterparty or customer risk. Do you expect to disclose or incur any material tariff-related contingencies?
3. How do you expect tariffs to affect assets on your balance sheet and your ability to timely account for those assets? For example, will there be significant changes in judgments in determining the fair value of assets measured in accordance with U.S. GAAP?
4. Do you anticipate any material impairments (e.g., with respect to goodwill, intangible assets, long-lived assets, right-of-use assets, and investment securities), increases in allowances for credit losses, restructuring charges, other expenses, or changes in accounting judgments that have had or are reasonably likely to have a material impact on your financial statements?
5. Do you expect tariffs to materially affect the demand for your products or services?
6. Do you anticipate a material adverse impact of tariffs on your supply chain, or the methods used to distribute your products or services? Do you expect the anticipated impact of tariffs to materially change the relationship between costs and revenues?

Each company will need to carefully assess the impact of tariffs and related material disclosure obligations. We encourage disclosure that is tailored and provides material information about the impact of tariffs to investors and market participants. Companies should consult with their advisors and proactively update disclosures as facts and circumstances change.