Key Takeaways
- Tariff refund claims generally qualify as recovery assets under Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 450 when realized or realizable.
- Tariff refund accounting depends on the original treatment of tariff costs, affecting inventory, cost of goods sold, fixed assets, expenses or customer liabilities.
- Financial statement disclosures should address tariff refund claims, recovery estimates, accounting judgments, liquidity impacts and material risks and uncertainties.
The Supreme Court’s February 2026 ruling that the International Emergency Economic Powers Act (IEEPA) did not authorize certain “Liberation Day” tariffs, and the subsequent launch of U.S. Customs and Border Protection’s Consolidated Administration and Processing of Entries (CAPE) function, have created a potentially significant recovery opportunity for U.S. importers. While the refund opportunity may be substantial, the accounting and financial reporting implications are complex and largely unprecedented.
Initial Steps
Before addressing accounting and reporting requirements, companies must first determine whether they have paid tariffs subject to the Supreme Court ruling and whether they have legal rights to pursue a refund.
Management should also evaluate customer and supplier contracts to determine whether tariff costs were passed through to customers and whether any contractual obligation exists to return future refunds. In many situations, legal counsel may be required to interpret contractual language and determine the enforceability of refund-sharing provisions.
The challenge for management is to determine how and when a tariff refund claim should be recognized in its financial statements.
Recognition of Tariff Refund Claims
A central accounting question is when a tariff refund claim should be recognized.
The prevailing view is that tariff refund claims should be analyzed as recovery assets for which the Financial Accounting Standards Board (FASB) Codification references the application of FASB Accounting Standards Code (ASC) 450, Contingencies. In many cases, filing a claim alone may not be sufficient to support recognition. Applying this literature, a receivable should not be recognized until the claim is realized or realizable.
Management should evaluate the following in determining whether recognition is appropriate:
- Legal enforceability of the refund claim
- Compliance with CBP filing requirements
- Sufficiency of supporting documentation
- Historical experience with claim approvals
- Ability to estimate the recoverable amount
Subsequent Event Considerations
Organizations with reporting periods ending before the February 2026 Supreme Court ruling, but whose financial statements had not yet been issued, should evaluate the impact under FASB ASC 855, Subsequent Events.
Two interpretations may be considered:
Type I (Recognized) Subsequent Event: Under this view, the Supreme Court ruling provides additional evidence regarding conditions that existed at the balance sheet date, namely the validity of tariffs previously imposed.
Type II (Nonrecognized) Subsequent Event: Alternatively, the ruling may be viewed as a legal event occurring after the reporting date, requiring disclosure but not adjustment of historical financial statements.
Management’s analysis of the two interpretations should consider the:
- Legal status of the claim at the reporting date
- Ability to estimate recovery
- Enforceability of refund rights
- Company’s historical accounting treatment of tariffs
The conclusion reached may significantly affect both timing of recognition and disclosure requirements. We believe disclosing the event as a Type II subsequent event and not recording the receivable would be an appropriate conclusion for calendar 2025 year-end financial statements. For financial statements with reporting periods after February 2026, we believe recording the receivable as a Type I subsequent event would be an appropriate conclusion based on application of FASB ASC 450, Contingencies.
Accounting for Tariff Refund Claims and Receipts
The accounting treatment depends largely on how the original tariff costs were recorded.
Scenario 1, Tariffs Were Capitalized into Inventory: If tariffs were capitalized as part of inventory costs, any recoverable amount reduces the carrying value of inventory. If some or all of the related inventory has been sold, that portion of the refund related to the inventory sold should reduce cost of goods sold rather than inventory.
Scenario 2, Tariffs Were Capitalized into Fixed Assets: If tariffs were capitalized as part of fixed assets, any recoverable amount can be recorded either by:
- reducing the carrying value of fixed assets and adjusting depreciation prospectively, or
- a cumulative catch up by allocating the refund between the carrying basis of the fixed asset subject to the tariff and reversing the previously recorded depreciation expense
Scenario 3, Tariffs Were Expensed When Incurred: If tariffs were recorded directly as an expense, recording the probable refund reduces the related expense account or is recognized separately as other income. The presentation should be applied consistently and supported by the company’s accounting policy.
Scenario 4, Customer Reimbursement Obligation Exists: If management concludes that the refund will be returned to customers, the accounting entry at recognition will pass through to the customer by setting up an appropriate liability.
Scenario 5, Uncertainty Remains Significant: When collection remains uncertain or the amount cannot be reasonably estimated, recognition is not appropriate. In such circumstances, disclosure may be required even though no asset is recorded.
Financial Statement Disclosures
Financial statement users will likely expect transparent disclosure regarding tariff refund claims estimates and related uncertainties.
Disclosures may include:
- Nature of the tariff refund claims
- Status of claims filed with CBP
- Estimated amounts or ranges of recovery
- Key assumptions used in determining recoverable amounts
- Related customer obligations
- Significant judgments and accounting policies
- Liquidity implications
- Material risks and uncertainties
Particular attention should be given when tariff refunds may significantly affect earnings, liquidity, debt covenant compliance, forecasts, or future operating results. In some situations, auditors and accountants may determine that additional emphasis or explanatory language is warranted in their reports.
Key Reminders
- Determine whether your imports qualify for a refund
- Evaluate customer and supplier contracts before recognizing recoveries
- Recognition of refund claims depends on probability and reasonable estimation
- Financial statement presentation varies depending on how tariffs were originally accounted for
- Early planning can help maximize recovery while avoiding reporting issues
How PKF O’Connor Davies Can Help
The tariff refund environment continues to evolve rapidly, creating both opportunities and risks for importers. PKF O’Connor Davies assists clients in:
- Identifying potentially recoverable tariffs
- Evaluating CBP refund eligibility
- Assessing contractual obligations with customers and suppliers
- Determining appropriate accounting treatment and journal entries
- Evaluating ASC 450, ASC 855, and ASC 606 implications
- Addressing tax consequences and planning opportunities
- Preparing financial statement disclosures
- Assessing impacts on liquidity, forecasts, and lending agreements
A proactive approach can help organizations maximize recovery opportunities while ensuring compliance with accounting, tax, and financial reporting requirements.
Contact Us
PKF O’Connor Davies works with organizations across a broad range of industries and ownership structures on financial statement audits, reviews, internal control considerations and other accounting and assurance matters.
To explore how these tariff refunds may affect your financial reporting, please contact your client service team or:
Jonathan Zuckerman, CPA
Partner
jzuckerman@pkfod.com | 646.699.2842
John Haslbauer, CPA
Partner
jhaslbauer@pkfod.com | 646.699.2838