How will new import tariffs affect impairment testing of non-current assets?

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.

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?​

The increased risk and uncertainty triggered by tariffs need to be factored into the recoverable amount.

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 does not reflect adjustments for factors that have been incorporated into the estimated cash flows and vice versa. Otherwise, the effect of such factors would be double-counted. ​

Companies need to provide disclosures about significant judgements and assumptions made in their impairment testing, including any estimation uncertainty, under IAS 36 and IAS 1 Presentation of Financial Statements. During periods of heightened uncertainty – e.g. when new tariffs and counter-tariffs are announced and amended at short notice – users of the financial statements may require more detailed information. Therefore, disclosures need to be clear and meaningful. The nature and extent of the information provided may vary depending on the company’s specific facts and circumstances and the nature of the assumptions it makes.

If a company’s business model is sensitive to tariffs, then disclosures in the following areas may be appropriate.

Is the impact of tariffs reflected?

A company may need to disclose whether and which tariffs are reflected in the recoverable amount.

What judgements and assumptions have been made?

If tariffs are reflected in the recoverable amount, then relevant disclosures about the significant judgements and key assumptions used may be necessary. For example, if a company uses the ECF approach, then it discloses how the impact of tariffs is reflected in the future cash flow projections and probabilities assigned to them.

If tariffs are not reflected in the recoverable amount, then a company may need to provide information that is relevant to the users’ understanding of this.

What uncertainty exists at the reporting date?

If uncertainty about tariffs exists at the reporting date, then a company may need to:

• disclose information on the nature of the uncertainty, sensitivities and the range of reasonably possible outcomes; and
• explain the changes made to past assumptions if the uncertainty remains unresolved.

For example, at the reporting date, countries may still be negotiating a tariff deal and there may be uncertainty around whether and when such a deal will be agreed. In times of heightened uncertainty, the range of reasonably possible outcomes may be larger than usual.

Interim reports

IAS 34 Interim Financial Reporting requires significant events and transactions since the most recent annual or interim reporting date to be explained. For example, if a company recognises a significant impairment loss as a result of tariffs in the interim period, then this needs to be disclosed. The appropriate level of disclosure about the impact of tariffs on impairment testing may vary depending on the company’s circumstances. 

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.