The imposition of new tariffs is a non-adjusting event for entities with 31 December 2024 financial reporting date.

The imposition of new tariffs may impact the entity’s ability to continue as a going concern. The going concern assessment is to be performed up to the date that the financial statements are authorised for issue. 

If the going concern assumption is no longer appropriate, there is a fundamental change in the basis of accounting and this should be disclosed in the financial statements.

Depending on the financial reporting date, the imposition of new tariffs could be considered a current period event, subsequent adjusting event or subsequent non-adjusting event. Hence, assessment is required.

If determined to be a subsequent material non-adjusting event, the entity should disclose its nature and an estimate of its financial effect. If the entity is unable to estimate the financial effect, it should disclose that fact.

The entity should consider disclosing impact on the following items*:

- Breach of loan covenants

- Changes in economic & market conditions affecting fair values of assets & liabilities

- Changes in impairment assessment of non-financial assets

- Additional expected credit losses due to declining repayment ability of certain debtors

*list is not exhaustive

The imposition of new tariffs may impact the entity’s ability to continue as a going concern. The going concern assessment is to be performed up to the date that the financial statements are authorised for issue. 

If the going concern assumption is no longer appropriate, there is a fundamental change in the basis of accounting and this should be disclosed in the financial statements.

Tariffs may result in an indicator of impairment (e.g. decreased sales, increased production costs, impact on investment or business plans etc.) 

The entity is to assess the recoverable amount and disclose significant judgement/ley assumptions made.

There is a potential need for entities to adjust the approaches to determine the ECL based on the available information about past events, current conditions and forecast scenarios of future conditions.

The newly imposed tariffs may increase costs significantly such that the unavoidable costs of fulfilling the contract exceed the consideration to be received. Entities should review their contracts to determine if any contract has become onerous.

As part of the risk assessment, auditors should understand how changes in events, conditions, and company activities affect risks of material misstatement, including risk of financial reporting fraud. Attention should be paid to situations where the impact of tariffs may be significant due to the nature of the entity’s business or industry, or where there are substantial changes to the entity’s operational business model. Given the volatility of tariff policies, auditors are reminded that the risk assessment is an iterative process which would mean monitoring the continuous developments, ensuring that updates to tariff policies are reflected in the ongoing assessment. 

Characteristics of entities that could be significantly impacted may include: 

• Exporters with customer bases that are solely or heavily concentrated in the US market.
• Exposure to highly competitive or price-sensitive markets, where tariff-related cost increases cannot be readily passed on to customers.
• Limited supply chain flexibility and significant dependence on regions subject to increased tariff measures.

The situation is still evolving and governments continue to make announcements on tariffs, retaliatory tariffs and other measures. To the extent such announcements are made after the end of a reporting period, entities will need to carefully evaluate whether they constitute an adjusting or non-adjusting subsequent event. 

Entities with financial reporting date as at 31 December 2024 

The imposition of new tariffs after the reporting date is a non-adjusting event for entities with 31 December 2024 financial reporting date. 

Auditors should perform audit procedures to obtain sufficient appropriate audit evidence that the required disclosures have been identified and assess whether those disclosures are adequate. 

Entities with financial reporting date on or after 1 January 2025 

Auditors should evaluate management’s assessment of whether the newly imposed tariffs (along with the 90-day halt) constitute a current period event, subsequent adjusting event or subsequent non-adjusting event. 

If determined to be a subsequent material non-adjusting event, auditors need to similarly evaluate the adequacy of management’s disclosures.

Given the heightened uncertainty, auditors should place sufficient focus on reviewing financial statement disclosures. If a company is significantly impacted, users can only fully understand how tariffs and the resulting economic volatility have affected the entity’s financial position and performance through comprehensive disclosures.

If newly imposed tariffs are expected to significantly impact the entity’s business, this may affect its liquidity and consequently, its going concern assessment. Auditors should evaluate management’s going concern assessment with specific attention to key elements of the assessment, for example:

• Cash flow projections incorporating tariff impacts.
• Sensitivity analyses on key assumptions.
• Probability weighted scenarios to account for the uncertainty surrounding tariff implementation and ongoing trade negotiations. 

Where the use of going concern assumption is appropriate but material uncertainty exists, and adequate disclosures have been made in the financial statements, the auditors are reminded to include a separate ‘Material Uncertainty Related to Going Concern’ section in the auditor’s report. Where the use of going concern assumption is inappropriate and the financial statements are prepared on a going concern basis, the auditor should express an adverse opinion. 

Auditors should review management’s assessment of tariff-related impairment indicators to determine whether tariffs have a significant adverse impact on the recoverable amount of assets. 

Potential indicators may include: 

• Decline in demand and revenue / termination of revenue contracts

o PPE used to produce goods primarily for the US market may become under utilised.

o Lower sales volumes may also lead to inventory write-downs due to excess stock or slower turnover.

• Higher costs or supply chain disruptions may negatively affect future cash flows.
• Operational or strategic changes – adjustments to business models, such as shifting production locations or changing suppliers may render certain assets obsolete, necessitating impairment assessment.
• Net assets of the entity are more than its market capitalisation.

When reviewing management’s assessment, auditors should evaluate whether assumptions used in impairment assessment reflect current trade and market conditions, including the impact of tariffs. Key assumptions in value-in-use calculations that may be affected include: 

• Revenue growth rates (which should consider potential effects of tariffs)
• Discount rates
• Gross margin projections
• Working capital requirements

Auditors should also evaluate the adequacy of disclosures related to significant judgment / key assumptions used in determining recoverable amounts, including sensitivity analysis and range of possible outcomes.

The auditor should review management’s assessment of the impact to ECL on receivables arising from potential defaults or delayed payments due to tariffs or broader economic conditions. In evaluating the assumptions and inputs used in estimating ECL, considerations include:

• Whether the uncertainty surrounding the imposition of tariffs are reflected in probability-weighted ECL
• Whether the potential impact of tariffs and other macroeconomic factors are reflected in the forecasts of future economic conditions   

The newly imposed tariffs may increase costs significantly such that the unavoidable costs of fulfilling the contract exceed the consideration to be received. Entities may have long-term supply and revenue contracts with fixed pricing or minimum volume commitments, which can become burdensome when tariffs drive up production costs and dampen consumer demand. For example, a supplier significantly impacted by tariffs may struggle to meet its contractual obligations, which can in turn affect its customers’ ability to fulfil their obligations further down the value chain. Auditors should be alert to such risks when reviewing contracts, particularly when contract terms do not align with the current economic conditions.