As the financial stewards of their organizations, CFOs have a responsibility to ensure revenue is recognized properly under ASC 606.
But when tariffs disrupt global trade, it can complicate this critical accounting standard.
Tariffs are at least temporarily back in play, creating fresh revenue recognition challenges for CFOs. So, how do these trade strategies impact the revenue recognition process, and what are the implications for our financial reporting?
How Do Tariffs Impact RevRec for Different Contract Types?
ASC 606 dictates that revenue be recognized when control of goods or services is transferred to the customer. The transaction price should reflect how much the company expects to collect. Tariffs influence this process by hiking up the cost of goods, forcing companies to recalibrate their pricing strategies and contract terms.
Given the current environment, CFOs must pause and understand how these tariff-driven changes affect revenue recognition under ASC 606.
- In contracts with variable pricing that allow pricing adjustments when tariffs increase, companies must incorporate estimated tariff impacts when setting the transaction price.
- In fixed-price or long-term agreements with a single performance obligation, companies need to account for tariffs when projecting revenue and costs over the life of the contract.
- In broader contracts with multiple performance obligations—e.g., product delivery and ongoing maintenance—organizations may recognize price adjustments prompted by tariffs as each obligation/milestone is fulfilled. This can create complexity in the application of ASC 606.
Key Takeaway: Fluctuating tariffs and product/service delivery timelines require CFOs to maintain meticulous tracking and documentation to comply with ASC 606.
Major Revenue Recognition Pitfalls Posed by Tariffs
One significant challenge some CFOs are facing: contracts without enforceable rights to pass tariff costs to customers.
In situations where tariffs drive costs above the agreed-upon price, you could be looking at a loss contract—forcing immediate recognition of the full projected loss under ASC 606. This can immediately impact financial statements, especially revenue and gross margins.
Consider an American manufacturer reliant on imported materials. New tariffs go into effect on some of their imports, and the company opts to absorb those extra costs. The result: This shrinks their profit margins and may necessitate a write-down if the net realizable value falls below their costs.
Key Takeaway: This scenario underscores why CFOs need robust capabilities for both contract analysis and proactive accounting adjustments, all while maintaining an efficient close process.
How CFOs Can Navigate ASC 606 Amid Tariff Uncertainty
To successfully navigate ASC 606 in a tariff-impacted environment, CFOs must make their processes as agile and automated as possible. Companies should proactively:
- Evaluate both current and future contracts for significant tariff risks
- Collaborate closely with accounting and tax teams to provide accurate inputs for the tariff impact calculations
- Accurately calculate tariffs based on delivery dates and current trade policies
- Update pricing models accordingly
- Enhance financial disclosure practices to communicate uncertainties in cash flows and revenue
RightRev’s Revenue Automation platform helps CFOs manage these complexities with native support for midstream contract modifications, multi-element arrangements and variable considerations—including those resulting from tariffs—without needing customization or configuration.
“Maintaining compelling and predictable revenue and unit economics is challenging at all times,” says Dan Miller, CFO of RightRev. “However, with the introduction of volatile tariff regimes, there is even more of a burden placed upon the Office of the CFO to automate the rigorous process of calculating the impact of tariffs and utilizing scalable systems and processes to close the books in a timely fashion and forecast the future impact on the business.”
While we can’t control broader geopolitical and economic forces, CFOs can control one key thing: adapting ASC 606 policies, processes and systems to account for tariffs. This allows companies to uphold compliance and efficient financial reporting, transforming this regulatory challenge into a competitive edge.
Learn more about how companies are automating revenue recognition with RightRev.
