Supreme Court overturns IEEPA tariffs

KPMG highlights financial statement considerations following the February 20, 2026 Supreme Court ruling that overturned IEEPA tariffs, the universal refund order by the Court of International Trade (CIT), and the government’s notice to appeal the CIT order.

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Applicability

Companies affected by IEEPA tariffs

Background

The International Emergency Economic Powers Act (IEEPA) authorizes the US President to regulate certain economic transactions during a national emergency. Although historically used for sanctions, it has recently been invoked to impose tariffs – a use that was challenged in court as exceeding statutory and executive authority.

On February 20, 2026, a US Supreme Court ruling overturned the tariffs imposed under IEEPA. The ruling did not address refunds and, as such, there is uncertainty about whether all companies who paid IEEPA tariffs may be entitled to refunds. On March 4, 2026, the Court of International Trade (CIT) ordered the Trump administration to begin refunding all tariffs imposed under IEEPA.

On April 20, 2026, Customs and Border Patrol (CBP) began accepting phase one IEEPA claim submissions for validation and refund processing in the Consolidated Administration and Processing of Entries (CAPE) system. Importers began receiving refund payments for some of their claims in May.

On May 29, 2026, the Administration issued notice to the CIT of its intent to appeal the court’s order requiring universal refunds and the reliquidation of finally liquidated entries. The Administration argues that the CIT lacks the authority to require these refunds unless an importer has filed its own complaint with the CIT. The Administration stated in its notice of appeal to the CIT that CBP is relying on the Administration’s own authorities to begin refunding approximately $85 billion of the IEEPA tariffs – over half the total amount of IEEPA tariffs paid. This statement relates to the phase one claims currently being processed in CAPE and may indicate that the Administration intends to provide these refunds at its own discretion and not because of the court order.

Subsequent events considerations for financial statements unissued as of February 20, 2026

For companies that have not yet issued their financial statements as of February 20, 2026, the Supreme Court ruling is a subsequent event evaluated under ASC 855.

Reminder of ASC 855 requirements

ASC 855 requires companies to evaluate events that occur after the balance sheet date but before financial statements are issued (or available to be issued) to determine whether those events require recognition or disclosure.

ASC 855 distinguishes between two categories of subsequent events:

Recognized (Type 1) subsequent events provide additional evidence of conditions that existed at the balance sheet date and require adjustment to the financial statements.
Nonrecognized (Type 2) subsequent events relate to conditions that arose after the balance sheet date and do not require adjustment, but disclosure is required if the event is material and omission would be misleading.

Determining whether a subsequent event is Type 1 or Type 2 requires judgment.

Financial statement disclosure implications

We believe it is acceptable to treat the Supreme Court’s decision as a nonrecognized (Type 2) subsequent event in financial statements that have not yet been issued as of February 20, 2026.

If the Supreme Court’s ruling is expected to have a material effect on the financial statements when recognized, or not disclosing it would otherwise result in the omission of material information to financial statement users, companies disclose the nature of the decision and its expected implications. Such disclosures may address, for example, the potential effect on existing and future tariffs exposure, supply chain arrangements, liquidity or ongoing or anticipated legal proceedings. Companies estimate the financial effects based on information known as of the date the financial statements are issued (or available to be issued) and are careful to avoid speculative or overly forward‑looking statements.

As with all subsequent events analyses, conclusions are grounded in company‑specific facts and circumstances. Companies also consider whether related disclosures are required under other US GAAP topics, such as ASC 275 on risks and uncertainties, ASC 205-40 on going concern or ASC 450 on contingencies.

Accounting for potential tariff refunds

Recognition and measurement of refunds

We believe it is appropriate to apply a loss recovery model to account for potential refunds from the government.

Alternatively, we believe it is acceptable to apply a gain contingency model to account for refunds.

Under the loss recovery model, the amount to be recognized is limited to the amount of the loss incurred for which recovery is probable. When the claim is in dispute, there is a rebuttable presumption that realization is not probable. Consideration of subsequent events is important to assessments made under the loss recovery model. Companies should monitor developments closely and significant judgment may be required in evaluating whether and when the probable threshold is met.

Under the gain contingency model, the accounting requires an evaluation of when the contingency for each claim is resolved, which may differ on a claim-by-claim basis and be affected by administrative and legal processes.

Facts and judgements to consider

As a result of the government’s notice to appeal the CIT order requiring universal refunds, companies should evaluate the risk profile of their specific IEEPA entries by considering facts such as:

the liquidation status of entries
whether claims have been approved or paid within the CAPE system, and
whether the company’s entries are subject to a complaint filed with the CIT.

Consultation with legal counsel can inform judgments about the probability of the CIT’s universal refund order being upheld.

Presentation of tariff recoveries

We believe it is appropriate to record refunds of previously paid tariffs as an offset to the financial statement caption in which the original tariff cost was recognized (e.g., inventory, COGS). We believe any interest received as part of the refund should be presented separately, typically within other income.

Suppliers’ accounting for potential refunds

Other accounting considerations

The loss recovery and gain contingency models do not apply to other estimates in the financial statements where anticipated tariff changes are estimated (e.g. impairment assessments, estimates to complete an over time customer performance obligation).

Customer refund rights

Regardless of the model applied to the potential refund, companies evaluate whether their contracts with customers provide an obligation to provide a refund if tariff costs were passed through to customers and refunds are obtained.

If refunds are not contractually required but are expected to be provided to customers, companies evaluate whether a contract modification or price concession accounting model is appropriate for their facts.

Customers’ accounting for potential refunds

Rights to refunds

Companies that are not importers but paid increased prices evaluate whether they have a contractual refund right before applying a loss recovery model. If no contractual refund right exists, a contract modification may be required to obtain a refund, in which case a refund would not be recognized before an enforceable right exists.

Sale of refund claims

Recognition of the refund right will be accounted for under either the loss recovery or gain contingency model. Companies that enter transactions to sell their rights to future refunds from the government will generally account for those transactions as debt.

Cash received from a third party for those rights is recognized as debt with any accretion of the initial amount recorded as interest expense.

Companies that do not want to apply derivative accounting for these transactions may need to early adopt the recent derivatives scope refinements guidance.