Controversial as they may be, tariffs have long been a tool for governments to generate revenue and protect domestic industries. However, their recent reintroduction is rippling through both private and public companies’ financial reporting, particularly under ASC 606.
When tariffs enter the equation, they can complicate the revenue recognition process, affecting how businesses estimate transaction prices, allocate revenue and manage costs. Let’s explore how tariffs influence ASC 606 compliance and what it means for companies today.
Variable price contracts vs. longer-term contracts
Under ASC 606, revenue recognition hinges on transferring control of goods or services to a customer, with the transaction price reflecting the amount a company expects to receive. Tariffs directly impact this by increasing the cost of goods, which can alter pricing strategies and contract terms.
For companies with variable price contracts that allow price adjustments for tariff increases, ASC 606 requires estimating these changes when determining the transaction price.
In a longer-term contract with a single performance obligation, such as delivering a fixed-price service engagement, tariffs are factored into both revenue and cost estimates over the contract’s life.
If multiple performance obligations exist—like product delivery followed by maintenance—tariff-driven price adjustments may be recognized as each obligation is fulfilled. The impact of changing tariffs and the timing of delivery demands careful tracking and documentation to stay compliant.
Tariff Challenges for Revenue Recognition – And How to Solve Them
One particular challenge that arises is when contracts lack enforceable rights to pass tariff costs to customers. If tariffs push costs above the agreed price, a company might face a loss contract, requiring immediate recognition of the entire projected loss under ASC 606. This can significantly impact financial statements – in particular, revenue and gross margins.
For example, a U.S. manufacturer importing materials hit by new tariffs might absorb the cost, reducing margins and triggering a write-down if the net realizable value dips below cost. This scenario underscores the need for robust contract analysis and proactive accounting adjustments, all while maintaining the ability to close the books on time.
Navigating tariffs under ASC 606 requires agility and automation. Management must assess contracts for tariff exposure, calculate accurate tariffs based on delivery dates in effect at that time, update pricing models, and enhance disclosure practices to reflect uncertainties in revenue and cash flows.
RightRev’s Revenue Automation platform natively supports midstream contract modifications and seamlessly handles multi-element arrangements and variable considerations—such as those resulting from tariffs—without requiring additional configuration or customization.
Importantly, as noted above, the accounting and tax functions must provide accurate inputs to properly calculate the impact on the financial statements. As global trade tensions fluctuate, companies that adapt and tune their ASC 606 processes and systems to account for tariffs will maintain compliance and efficient month-end processes, turning a regulatory challenge into a strategic advantage.
