European Luxury & Sportswear "Who could benefit from tariff refunds?" Krankowski

Research evidence excerpt

European Luxury & Sportswear "Who could benefit from tariff refunds?" Krankowski

How are refunds likely to be recognised in the financial statements?

To recognise a tariff refund within the financial statements, the company must assess the

refund as virtually certain. This is likely to be where the company establishes a legally

enforceable right to receive the refund. Until a company has established they have a

legally enforceable right, the potential tariff refunds will likely be treated as a contingent

asset, and disclosed in the notes to the financial statements.

Once a company assesses the tariff refunds as virtually certain we expect them recognise

the refund as receivable within their assets on their balance sheet (A/C: tariff receivable

up). The other side of this entry is dependant on whether the tariff relates to a product

that has been sold, or is unsold (i.e. currently within the company's inventory). When the

tariff refund is received, cash will increase (A/C: cash up, tariff receivable down).

Where the tariff refund relates to tariffs charged on inventory imported to the U.S. that

have already been sold, the tariff refunds will be recognised in the Income statement by

reducing cost of goods sold (A/C: tariff receivable up, gross profit up). This is likely to

provide a one-off boost to gross profit at the point that the company assess the tariff

refunds as virtually certain.

have not been sold yet, the tariff refund will be recognised by reducing inventory on the

Balance sheet (A/C: tariff receivable up, inventory down). While a one-off reduction to

inventory, the benefit of the lower inventory cost will be recognised in the income

statement as the inventory is sold.

Figure 2: Tariff refunds may also affect revenue and inventories from an