Effects of tariffs on SEC quarterly disclosures

Various financial reporting implications can arise due to the complexities associated with the evolving tariff and trade policy, potentially affecting multiple areas of financial reporting. We summarize key areas of financial reporting that can be susceptible to economic uncertainty, including the effects of tariff and trade policy here. 

KPMG observation: While disclosures about tariff and trade policy effects are common in recent Form 10-Q reports, most substantive disclosures are not being made in the financial statements or notes to the financial statements. However, when the effects are being discussed there, they are typically in the context of uncertainties associated with estimated financial information – e.g. increased estimation uncertainty that arises in a bank’s allowance for loan losses.

This trend was also observed in our Q2 analysis – yet while most disclosures remain outside the financial statements, there is a growing trend of companies incorporating tariff estimates into their financial results. Some, for example, have considered whether the uncertainty around the evolving tariff and trade policy has triggered a goodwill impairment while others have incorporated tariff estimates into their baseline economic forecasting.

In Management's Discussion and Analysis (MD&A), a registrant is required to discuss its financial condition, changes in financial condition and results of operations. This section of a registrant’s filing is critical for investors seeking insight into future performance and strategic planning.

In MD&A, a registrant is required to disclose information about:

• uncertainties that will – or are reasonably likely to – result in its liquidity increasing or decreasing in any material way;
• any known material trends, favorable or unfavorable, in its capital resources;
• significant economic changes that materially affected the amount of reported income from continuing operations; or
• known trends or uncertainties that have had – or it reasonably expects will have – a material favorable or unfavorable effect on net sales, revenues or income from continuing operations.

KPMG observation: Given the economic uncertainty that changes to tariff and trade policy brings, it is not surprising that approximately 75% of all Form 10-Q filings we examined refer to evolving tariff and trade policy in the MD&A section. 

In our Q1 analysis, many registrants acknowledged that the economic uncertainty brought upon by evolving tariff and trade policy could potentially affect their operations and financial results in the future, with disclosures often being qualitative in nature and focused on financial strategies to navigate this uncertainty, such as cost management practices, possible pricing adjustments, and enhanced strategic planning. However, in our Q2 analysis, while this acknowledgement of potential effects continued, many registrants reported actual, material effects—often quantified. Disclosures have evolved to become more detailed, with quantification of anticipated operational effects becoming more common, and registrants now beginning to describe specific mitigation strategies, such as optimizing sourcing, accelerating production and shipments, and relocating manufacturing operations.

The SEC’s disclosure requirements for this section of the Form 10-Q mandate that a registrant disclose the reasons for any material quantitative and qualitative changes in market risk exposures and how the registrant manages these risks.

The quantitative aspect of this obligation requires a registrant to provide detailed information on market risk factors, which can include fluctuations in interest rates, currency exchange rates, commodity prices, and other financial variables that may affect the registrant’s financial outlook.

In addition to numerical data, a registrant is required to discuss any significant shifts in its market risk exposure compared to the previous fiscal year. This involves explaining the underlying reasons for these changes, whether due to strategic decisions, changes in the economic environment, or adjustments in its risk management approach.

KPMG observation: While few registrants appear to be making substantive disclosures in this section of their Form 10-Q filings currently, disclosures are expected to evolve to include anticipated macroeconomic effects and management strategies to mitigate risk exposures.

In this section of the Form 10-Q filing, a registrant is required to discuss the most significant factors that make an investment in it or its offering speculative or risky. This includes providing a description of material risks that could potentially affect its operations and financial results.

Risk factors are required to be specific and related to matters that directly affect the registrant. Risk factors can relate to a wide array of uncertainties, from market volatility and regulatory changes to operational challenges and geopolitical tensions.

A registrant is also required to disclose any new risks or material changes to the risks previously disclosed in its last annual report (Form 10-K) or quarterly filing.

KPMG observation: As US tariff and trade policy evolves, a registrant's exposure to macroeconomic effects can significantly change. This recognition is evident in Form 10-Q filings.

In our Q1 analysis, disclosures addressed uncertainty, regulatory compliance, supply chain risks, and adaptation strategies concerning changing tariff and trade policy risks. While these themes remained in our Q2 analysis, disclosures have shifted to highlighting current effects, with registrants reporting that these risks are actively affecting business operations and financial results. While the focus remains on anticipating effects, many registrants have begun addressing those effects that are currently occurring.

This is the most common theme discussed in the Form 10-Q filings we analyzed. At the very least, most registrants are acknowledging the economic uncertainty brought on by the evolving tariff and trade policy, including retaliatory tariff policies. In most cases, they are also acknowledging that the effects these policies could have on their organization are uncertain.

Many registrants also are discussing risk mitigation strategies, including contingency plans and adaptive measures they are taking, or considering taking, to protect their operations and support financial stability amidst economic uncertainty.

In our Q2 analysis, we observed similar trends, but with a notable increase in companies quantifying, modeling and embedding tariff and trade policy risk into their financial processes. These risks are increasingly becoming an input into economic forecasting and asset impairment testing, with companies providing more transparency and detail about how these risks could affect their financial results.

In our Q1 analysis, few registrants disclosed quantitative financial effects from the US tariff and trade policy, but many were beginning to discuss qualitatively anticipated future effects – for example, some expressed concern over rising costs to acquire raw materials and the knock-on effects on margins and revenues if they could not pass costs on to customers.

In our Q2 analysis, we observed a clear shift toward more explicit and quantified disclosures of financial effects from tariffs and trade policy. Many registrants are now providing specific dollar amounts or quantified margin effects related to tariffs. This marks a shift from primarily qualitative discussion to more concrete, data-driven disclosures as tariff and trade policy developments continue and mature.

Across filings, registrants are also highlighting how tariffs are contributing to higher input costs, supply chain expenses, and operational challenges, with some noting that these effects are already material to their financial results. At the same time, a number of registrants continue to caution that while current-period effects may be limited, the evolving tariff environment is expected to drive further cost increases and financial pressures in future periods.

Disruptions in supply chains are a recurring theme. Registrants are acknowledging material effects to their supply chain and future effects that are reasonably likely to occur. In addition to acknowledging these current and future effects, many are discussing how they are trying to mitigate current or anticipated supply chain disruptions – e.g. increasing inventory storage in countries that are subject to more favorable tariff and trade policies, considering alternative sourcing, and relocating production.

While this trend was observed in our Q1 analysis, our Q2 analysis identified a focus on the unpredictability of supply chain effects and more detailed disclosures about actual supply chain disruptions and specific strategies to counter these effects. 

Registrants are outlining strategic initiatives to try to adapt to the evolving tariff and trade policy. Some examples include disclosures about efforts to diversify suppliers, leverage new technologies and modify business models to reduce exposure to tariffs.

While this trend was observed in our Q1 analysis, our Q2 analysis indicated that disclosures about strategic adaptation responses are becoming more detailed and more specific. For example, companies are discussing supply chain reconfiguration, price increases and sourcing shifts in more detail.    

Another common disclosure theme is highlighting the increasing compliance costs and regulatory challenges that registrants are navigating.

While this trend was observed in our Q1 analysis, in our Q2 analysis there was more emphasis on the challenge of keeping up with rapidly changing regulations.