What’s the issue?
Import tariffs are often used by countries to protect their local producers. In some cases, they are subject to negotiations between countries and a long legislative process. In other cases, new high tariffs may be imposed at short notice and may trigger retaliatory measures by the affected countries.
If so, they may cause uncertainty that significantly affects businesses – they can push economies into recession, disrupt supply chains and alter trade dynamics worldwide. As a result, they can impact the recoverability of non-current assets.
Companies can use the following steps to determine whether they need to perform an impairment test and, if so, how to reflect that impact in financial reporting.
Import tariffs are not new – they have been part of the international trade for centuries and companies know how to reflect them in the financial reporting. What may pose challenges is the pace of change at which the new tariffs are introduced and the uncertainty surrounding them. Companies need to monitor the developments closely and reflect them in their impairment assessment in a timely manner.
Step 1: Assess if new import tariffs result in an indicator of impairment
At each reporting date – annual and interim – a company considers whether there are any internal or external indicators that its non-current assets may be impaired.1,2
New import tariffs may significantly change market conditions or a company’s expectations about its performance. This could then indicate that assets or cash-generating units (CGUs) may be impaired. In making this assessment, a company needs to consider the significance of the overall impact of the tariffs that became effective (including any other related measures) during the period and those that will become effective in the near future.
For example, the new tariffs may:
- Impact sales: Tariffs may change the competitive environment and disrupt sales to key markets. Some companies (e.g. exporters) may decide to reduce the sales prices of products affected by the new tariffs. Others may decide to pass on the cost to their customers. The overall impact on future revenues will mainly depend on the sensitivity of demand for the company’s products to price increases, the company’s competitive position and exchange rate fluctuations.
- Increase production costs: A company may use imported components and raw materials that are subject to tariffs. This may result in lower profit margins if the company decides not to pass on the cost to its customers.
- Impact investment or business plans: If tariffs are expected to lower profits, then a company may reconsider its investment plans or decide to close or relocate its production facilities.
- Impact company’s market capitalisation: If new tariffs impact market participants’ view of the value of the company, then the carrying amount of the company’s net assets may be higher than its market capitalisation.
For a list of indicators included in IAS 36 Impairment of Assets, see Indicators of impairment, Question 2.
Step 2: Reflect the impact on the recoverable amount
Which tariffs to reflect – announced and proposed?
In calculating the recoverable amount of non-current assets using a discounted cash flow (DCF) technique, a company reflects tariffs:
- announced during the reporting period, and
- proposed and expected to become effective after the reporting date – if sufficient information is available and the impact is expected to be significant.
Which approach to use – single or multiple cash flows?
A company can use two approaches to project cash flows which theoretically are expected to result in the same outcome.
- Single cash flow approach (‘traditional approach’): Under this approach, a company uses a single most likely cash flow projection.
- Expected cash flow approach (‘ECF approach’): Under this approach, a company uses multiple probability-weighted cash flow projections.
Although the traditional approach is more common, in some cases it may be more appropriate to use the ECF approach to capture the impact of tariffs – e.g. if as a result of the tariffs significant downside scenarios are more likely and/or more severe than the upside scenarios.
What is the impact on cash flows?
Budgets and cash flow forecasts prepared by management generally serve as the starting point for estimating the future cash flows. Companies need to consider how the tariffs change their strategy and/or business plans and reflect that in the projection of future cash flows. Significant assumptions – e.g. forecast sales, growth rates and inflation rates, profit margins and capital expenditure – need to be reassessed and updated.
As for reflecting the impact of future uncommitted restructurings – e.g. reallocating production facilities to other countries – this depends on the approach applied.
- Under fair value less cost of disposal (FVLCD): uncommitted future restructurings are included in cash flow projections if this is consistent with a market participant’s perspective.
- Under value in use (VIU): cash flow projections exclude the impact of such restructurings.
What is the impact on the discount rate?
Under both VIU and FVLCD, the rate applied to discount the cash flows is based on a market participant's view of the asset or CGU.
The approach to reflecting the uncertainty about the future cash flows differs depending on the approach applied.
- Under the traditional approach: a company makes an adjustment to the discount rate for any cash flow uncertainty not captured in the single cash flow projection.
- Under the ECF approach: the uncertainty is considered in estimating the cash flows and the probabilities attached to them.
Whichever approach a company uses, the rate used to discount cash flows should not reflect adjustments for factors that have been incorporated into the estimated cash flows and vice versa. Otherwise, the effect of some factors would be double counted.
The increased risk and uncertainty triggered by tariffs need to be factored into the recoverable amount.
Step 3: Provide meaningful disclosures
Annual reports for periods ending on 31 December 20243
The tariff announcements are non-adjusting events for annual reports ending 31 December 2024.
If the tariff announcements are considered material – e.g. because they indicate that non-current assets may be impaired – then a company is required to disclose this fact and provide an estimate of the financial impact (or a statement that such an estimate cannot be made).
Annual reports for periods ending on 31 March 2025 (or later)
Detailed disclosure may be required about the following.
- Significant judgements or key assumptions used in calculating the recoverable amount. For example, if a company uses the ECF approach, then it discloses how tariffs impacted the scenarios used in projecting future cash flows and the probabilities assigned to the scenarios.
- Sensitivities and the range of possible outcomes. In addition to the sensitivity disclosures required by IAS 36, a company is also required to provide sensitivity disclosures under IAS 1 Presentation of Financial Statements. IAS 1 requires disclosure of the key assumptions that a company makes about the future and other major sources of estimation uncertainty at the reporting date – i.e. those that have a significant risk of resulting in a material adjustment to the carrying amount of assets and liabilities in the next financial year.
Interim reports in 2025
Impairment losses are examples of events and transactions for which disclosures are required under IAS 34 Interim Financial Reporting if they are significant.
IAS 36 provides relevant disclosures to be considered in this regard. The appropriate level of disclosure may vary depending on the company’s circumstances.
Find out more
Refer to Insights into IFRS®, our digital hub on Financial reporting in uncertain times and our digital guide on The impact of climate-related matters on impairment testing of non-current assets for further information.
1 This article focuses on impairment of non-current assets in the scope of IAS 36 Impairment of Assets. For investments in associates and joint ventures, a company considers the indicators of impairment in paragraphs 41A–41C of IAS 28 Investments in Associates and Joint Ventures.
2 Irrespective of any indicator of impairment, IAS 36 requires goodwill, intangible assets with indefinite useful lives and intangible assets not yet available for use to be tested for impairment at least annually.
3 Companies with January or February 2025 year-ends need to assess whether tariff announcements are considered current period events, subsequent adjusting events or subsequent non-adjusting events.
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