Every February the students at the University of Liverpool undertake a final-year project analysing a company’s financial statements and share price. In the first week of March, we show the students how to use Bloomberg terminals to analyse the share price to produce up-to-date information.
At this point I tell them they can just analyse the share price up to that date, even though the deadline for the project is late April. There’s no need to come back during April to update things, as the chance of a major event happening in that short window to hugely affect the share price is unlikely.
Estimates around future cashflows have the potential to be seriously affected
Well, on 2 April President Trump announced the raft of tariffs that upended global stock markets and, perhaps more importantly, flooded my inbox with panicking students wondering if the work they’ve done is sufficient or needs to be revisited.
Since then, there have been announcements about deals being made, pauses to tariffs, changes in rates and varying exemptions. We know that stock markets hate uncertainty, but what does this mean from a financial reporting perspective for preparers looking to finalise their financial statements?
Uncertainty and impairment
With most tariff rates yet to be finalised, the major concern for many global preparers of financial statements is likely to be around the accounting for the uncertainty of future amounts. The current situation means that estimates around future cashflows have the potential to be seriously affected, which creates a potential issue around impairment reviews for assets.
Most obviously, companies with significant amounts of revenue derived from jurisdictions facing tariffs should exercise caution over the future estimated cashflows. Similarly, entities importing goods and therefore facing increased input costs need to consider the ability to pass costs on to customers.
Companies must make sure that their disclosures around impairment calculations are robust
In addition to adjusting the potential future cashflows to reflect the uncertainty, the discount rate used needs to be considered. The greater the uncertainty around future cashflows, the higher the discount rate will be. This does raise the potential ‘double counting’ of the risk factor. Where the company has already reduced the future cashflows to reflect the risk, the discount rate should not also be increased to reflect the risk.
Indirect effects
Even domestic entities facing no direct impact relating to imports or exports need to consider items such as economic downturns and inflation in their calculations. This will affect the discount rates used in value-in-use calculations.
In the light of all this uncertainty, companies must make sure that their disclosures around impairment calculations are robust. They should be discussing key assumptions around the impact of potential future falls in demand and increased future costs. There should be some focus on the sensitivity of recoverable amounts to changes in assumptions.
Contracts changes
Slightly more complex areas affected could relate to revenue recognition or even leases. Entities should consider if the tariffs would cause any contract modifications (changes in price or scope), and estimates of variable consideration should be reviewed, particularly around estimates of progress towards completion and standalone selling prices.
Estimates made around estimates, particularly value in use, may be incorrect
Entities may well look to move manufacturing operations in the light of potential future input costs. In this case, expectations around termination or renewal must be considered. This could again lead to potential asset impairment or onerous contracts.
Going concern
The most significant, and clearly most worrying, issue is where a company needs to consider its ability to continue as a going concern. Where material uncertainties exist, entities will need to disclose these and any significant judgments made. The sources of estimation uncertainty will need to be disclosed and are likely to be increasingly important in ‘close call’ situations.
IAS 10
Perhaps the most important standard to consider is IAS 10, Events after the Reporting Period, which covers events between the end of the reporting period and the date the financial statements are authorised for issue.
Sometimes it pays to wait until as many as possible of the facts are known
Even if the tariff announcement arose after the end of the company’s reporting period, while it may not be evidence of conditions that existed at the end of the reporting period, it is likely to provide evidence that the estimates made around estimates, particularly value in use, may be incorrect. Entities will need to assess if they believe this to be an adjusting or non-adjusting event.
Wait it out?
Either way, it may be the case that entities issue their financial statements later, waiting to see if the final tariff decisions are resolved before issue. If so, this is likely to reduce an element of uncertainty in their figures.
Like the most diligent students in the University of Liverpool, sometimes it pays to wait until as many as possible of the facts are known before issuing the report. After all, it’s not just stock markets that hate uncertainty.
