As controllers, we’re responsible for ensuring our companies comply with accounting standards like ASC 606. But when tariffs enter the equation, it can complicate revenue recognition in ways we need to understand.
Tariffs have been making a comeback, creating new challenges for controllers when it comes to revenue recognition under ASC 606. It’s critical that we grasp how tariffs can impact the revenue recognition process and what it means for our financial reporting.
The RevRec Impact of Tariffs on Different Types of Contracts
Under ASC 606, revenue is recognized when control of goods or services transfers to the customer, with the transaction price indicating the amount the company expects to receive.
Tariffs have a direct impact on this process because they increase the cost of goods, which can force us to adjust our pricing strategies and contract terms. As controllers, we need to understand how these changes affect revenue recognition under ASC 606.
If your company uses variable price contracts that allow you to adjust prices based on tariff increases, ASC 606 dictates that you must estimate these tariff-driven price changes when setting the transaction price.
In the case of fixed-price service engagements and other longer-term contracts with a single performance obligation, tariffs should be taken into account for estimates of both revenue and costs over the life of the contract.
For wider-reaching contracts with multiple performance obligations, such as product delivery followed by maintenance, price adjustments driven by tariffs may be recognized in milestones as you fulfill each obligation.
Takeaway: Shifting tariffs and the timing of product/service delivery requires controllers to have careful tracking and documentation to remain compliant.
Key RevRec Challenges Caused by Tariffs
One major ASC 606 challenge that can arise for controllers is if your contracts lack enforceable rights to pass the costs of tariffs to customers.
In cases where tariffs lead to costs exceeding the agreed contract price, you could be facing a loss contract—requiring that you immediately recognize the complete projected loss under ASC 606. The immediate downside of this is the significant impact on financial statements, particularly revenue and gross margins.
Example: An American manufacturer that imports most materials is hit by new tariffs and decides to absorb the extra cost. That ends up not only reducing their margins, but also prompting a write-down if the net realizable value ends up below costs.
Takeaway: This example emphasizes why controllers need 1) powerful contract analysis and 2) proactive accounting adjustments—without losing the ability to close the books on schedule.
How Controllers Can Navigate ASC 606 in a Tariff Environment
As controllers, agility and automation are key to successfully navigating tariffs under ASC 606. We must proactively:
- Assess our existing and new contracts for risky tariff exposure,
- Calculate accurate tariffs based on delivery dates and which tariffs are in effect at that time,
- Update our pricing models, and
- Strengthen our disclosure practices to illustrate any uncertainties in cash flows and revenue.
To help manage these challenges, look for revenue recognition software with native support for midstream contract modifications and the ability to handle multi-element arrangements and variable considerations—including those that stem from tariffs. Even better if your chosen tool can do all this without requiring extra customization or configuration.
As controllers, it’s critical that we work closely with our accounting and tax teams to provide accurate inputs for tariff impact calculations on our financial statements.
We can’t necessarily do anything about global trade tensions, but there is one key thing we can control (no pun intended):
We can adapt our ASC 606 processes and systems to account for tariffs, ensuring we can continue to maintain compliance and run efficient month-end closes. The result? Transforming a regulatory challenge into a strategic advantage.
