Your business and supply chain could be impacted by import tariffs if you import materials from other markets.
Over the past few years, the topic of tariffs has come up frequently at business of all sizes. If you have operations in China, the tariffs likely have had an immediate impact on your business.
As the price of the imported materials increases, business owners need to determine how tariffs will impact their gross margins and how they should be accounted for.
When accounting for tariffs, the initial answer seems simple. The cost of inventory should include all direct and indirect costs incurred to prepare the item for sale. This would include the purchase price, plus any overhead, freight and taxes — including tariffs.
However, how you record the tariffs in your general ledger software is more of an art than a science and requires more thought. Consider the following items when recording tariffs:
Should you record the tariff as a separate account or build into the cost?
There are advantages and disadvantages to both options, and practicality should be considered.
An advantage to recording separately is that it allows you to identify the specific tariff costs in a separate category, as these costs can change quickly and be unpredictable. It gives the company the ability to separate the cost of the materials from other costs (e.g., freight, overhead, etc.) to provide more visibility, which may be helpful in determining if these costs need to be passed on to customers. Companies that use standard costs will need to reevaluate and update their standard costs as tariffs are implemented.
How material are tariffs to your operations?
It is important to determine how significant tariffs are to your business. Even if you may not be directly impacted by tariffs, the indirect impacts may be more significant. Therefore, it’s important to be aware of how these changes will impact your business to avoid any big surprises.
Are there any impairment issues?
Most inventory is valued at the lower of cost or net realizable value, which is its estimated selling price less reasonably predictable costs of completion, disposal and transportation. If inventory costs increase due to tariffs, companies will need to consider if they can recover these costs or pass them on to their customers. If not, an immediate write-down may be necessary.
When considering the items above, do not leave your accounting department out of the conversations. Planning ahead will help you deal with the impact of tariffs on your business. Understanding how these will impact your financial statements will allow you to communicate effectively with the users of the financial statements.