Tariffs are taxes on imported goods, and while opinions vary on their broader impact, most economists agree that the added costs are typically passed on to consumers through higher prices. Tariffs can also disrupt markets and affect international trade. Ongoing debates about trade deficits, how they are calculated, and how to address them remain in the spotlight, but the immediate effect of new tariffs is that many imported goods now come with higher costs.
This article does not delve into the broader tariff debate but focuses on how to use your ERP system to monitor and manage the impact of tariffs on your business.
The top three reasons to track how tariffs are affecting your business:
Tracking tariffs in your ERP system is important because they can seriously affect your costs and bottom line. When tariffs raise the price of imported goods, your ERP helps you see the true cost of what you're selling, so you’re not caught off guard.
It also helps you figure out how those extra costs impact profits, keeps your inventory values accurate, and makes sure your financial reports stay on point. Plus, with that info, you can make smarter choices—like switching suppliers or adjusting your pricing.
Basically, it gives you the data you need to plan ahead, stay compliant, and avoid any nasty surprises when it comes to trade and customs.
If you import goods to sell in the United States, tariffs are unavoidable. There is, however, a way to delay the cost of tariffs. 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). 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.
Map courtesy of 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.
The volatility of the newly imposed tariffs requires constant research and maintenance. 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.
Setting up a separate tax category might also cause a problem with Use Tax calculations. Currently in Acumatica, the tax category for a stock item is a one-to-one relationship, so you would also have to potentially set up tax zones to record from where the item is being shipped. Obviously, this could cause confusion if the product is sourced from multiple countries, and/or tracking the data could be opened to human error.
Tim McClanahan, previously a financial auditor and now an Acumatica consultant with Clients First, has developed a way to maintain and record the tariffs by setting up a custom screen where tariff amounts on specific items are tracked. Then the standard Acumatica Landed Cost function is expanded to reference the custom screen to determine the cost of the tariff and apply it to the inventory item. This method allows the increased cost of the inventory item to be considered when selling that item.
Once the tariffs are set up as a specific Landed Cost, Acumatica can easily report on the tariff cost through one of their reporting tools. It can be pulled out as a separate line item on the financial reports or added to a dashboard to be monitored.
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.
If your ERP has a project accounting function similar to Acumatica’s, this may be an easy calculation to make. Naturally, the products incurring tariffs and the tariffs to be applied would have to be known.
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. For example, if a business contract cannot be amended to include the higher cost of the imported goods, there may be an impairment (change in cost) loss on the inventory. The impairment is calculated from the balance sheet balances before the tariffs were enacted. In order to use NRV, the new tariffs must be considered an unusual circumstance that was not reasonably predictable.
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.
Tax reporting considerations should be thoroughly discussed with your CPA. There may be new rules and requirements for deferred tax assets and other pre-tax impacts. For example, the higher cost of long-lived assets and goodwill may have an impact on a company’s deferred taxes due to impairments caused by the new tariffs. Your ERP system can be set up to record the changes to allow data-driven decisions and reporting.
The heart of most ERP software systems 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. All three of the leading ERP software systems that Clients First represents have flexible General Ledgers and reporting systems that will support your financial reporting. (The three software systems are Acumatica, Dynamics Finance & Operations, and Dynamics Business Central.)
Estimates of risk can be recorded in a dynamic business forecast. This could potentially affect the liquidity of the business because financials are always required to be reported under the company’s going-concern assessment – a forward-looking assessment at the time the financial statements are issued.
If the going-concern assessment shows considerable risk, notes on how the company plans to address the risk should be added as notations to the financials.
Contact Clients First Business Solutions to assess your current ERP system, especially if it is QuickBooks. QuickBooks is not AICPA approved, so defining and properly recording risks and inventory valuations affected by tariffs and integrating tariff costs into your valuations is not supported. Clients First can upgrade your company to an ERP system that integrates your operational transactions to your general ledger automatically – reducing errors, increasing accuracy, and ensuring acceptable financial reporting to banks and investors.
Acumatica financials can be implemented within 60 days to get you using a true accounting system. Then you can expand your new ERP system to include operations, customer relationship management, payroll, and more.
Contact us today. Our experienced team is ready to help you move steadily into the ever-changing economic atmosphere.