Understanding Tariffs
Tariffs are taxes on goods imported from other countries. While opinions differ on their overall effects, most experts agree that the extra costs are usually paid by the importing business. These costs are then often passed on to consumers through higher prices.
Basically, tracking the effects of tariffs gives you the data you need to plan ahead, stay compliant, and avoid any nasty surprises.
Foreign Trade Zone (FTZ) Warehouses or Assembly
Paying tariffs can be delayed if you import goods to assemble or use as a component of a larger system, the goods can be shipped to a Foreign Trade Zone (FTZ). There, they can be altered, used in manufacturing (within the FTZ), or even just stored until you need them. The tariff is paid when the goods leave the FTZ. FTZs are plentiful in the US. You can find a directory of them in both Wikipedia and Trade & Industry Development.
If goods are received into an FTZ and then shipped to a country outside the United States, the tariffs may be avoided all together. To determine this possibility, work with a knowledgeable customs or logistics professional.
In Acumatica, you can set up a warehouse for each FTZ being used and use standard Acumatica functionality to track the goods.
Determining your exposure to lower profitability due to tariffs
Probably the best way to determine your profitability risk is to research how the items used in the goods you sell will be subject to tariffs. Each item from countries subject to tariffs is listed by the US International Trade Commission on its Harmonized Tariff Schedule (HTS). The listing includes a reference number, description, and rates of duty (tariffs). The HTS has a search mechanism to help you find the item you are researching. For instance, searching for “converter” produced many rows of data, two of which are shown below. Note the HTS number and suffix in the left two columns. The HTS website will explain the other columns.
Tracking the effect of tariffs in your ERP, using Acumatica – The Cloud ERP as an example
Tracking tariffs on inventory items
Per PricewaterhouseCoopers, tariffs and duties should first appear on the Balance Sheet, not immediately expensed.
Using Landed Costs applies the tariff and duty charges to the individual inventory items as appropriate. If the bill for the tariffs and duties arrives after the inventory is already sold, standard Acumatica will create an inventory adjustment record that charges COGS for the portion of the Purchase Receipt that is already sold.
Tracking tariff effects within existing contracts
Tariffs will also affect existing contracts companies may have with their clients, specifically construction and production-type contracts. The total cost-at-completion of an existing contract may exceed the total revenue the company holding the contract expects to receive. According to a PricewaterhouseCoopers “indepth” report, “If there is an expected loss, the entire expected loss should be recorded in the period it becomes evident.”
Whether the contract can be modified depends on the terms and conditions of the contract. The Acumatica project accounting function may make calculation easy. Naturally, the products incurring tariffs and the tariffs to be applied would have to be known.
Reporting on the effect of the tariffs on the company financials
The tariff-increased cost of inventory may invoke the accounting rule of recording the lower-of-cost and net realizable value (NRV) as your Cost of Goods Sold (COGS). NRV is defined as the estimated selling price (as in a contracted price) of the goods in the normal course of business.
If the NRV assessment results in the expectation that the revenue resulting from selling the tariffed goods will not cover the costs of the goods, the write-down on inventory (the resulting loss) should be disclosed in the accounting period in which the NRV assessment is made (per PricewaterhouseCoopers).
Tax reporting considerations should be thoroughly discussed with your CPA.
We all know the heart of Acumatica is the General Ledger. Be sure your General Ledger has the accounts and/or subaccounts that support the reporting you need to disclose the risks and uncertainties related to the new tariffs.
Immediate actions you can take to insure compliance
- Define and properly record risks and inventory valuations affected by tariffs.
- Integrate tariff costs into your inventory valuations. (using Landed Costs is best)
- Adjust your financial reports to easily identify the effect of the new tariffs. (Consider a separate GL Account for tariffs and duties.)
