As the organization's financial manager, the CFO is responsible for ensuring that revenues are properly recognized under ASC 606.
However, tariffs can complicate this important accounting standard when it disrupts global trade.
Tariffs are at least temporarily returning to play, creating new revenue recognition challenges for CFOs. So, what impact these trade strategies have on the revenue recognition process and what are the impacts of financial reporting?
How do customs duties affect Rebrec for different types of contracts?
ASC 606 provides that revenue is recognized when management of a product or service is transferred to a customer. The transaction price should reflect how much the company collects. Tariffs affect this process by hiking the cost of goods and forcing businesses to readjust their pricing strategies and terms of contract.
Given the current environment, CFOs need to pause and understand how these tariff-driven changes will affect revenue recognition under ASC 606.
- Variable pricing contracts This allows for pricing adjustments as fees increase, and companies must incorporate the impact of estimated tariffs when setting transaction prices.
- Fixed price or long-term contract A single performance obligation requires companies to consider customs duties when projecting revenues and expenses over the contract period.
- With broader contracts with multiple performance obligations– EG, Product Delivery, Continuous Maintenance – Organisation may recognize price adjustments encouraged by customs duties as each obligation/milestone is met. This can create complexity in applying ASC 606.
Important points: Changes in the timeline of customs duties and product/service delivery require CFOs to maintain meticulous tracking and documentation to comply with ASC 606.
Major revenue recognition falls raised by tariffs
One of the key challenges facing some CFOs is the enforceable, unrighteous contracts that pass customs costs to their customers.
In situations where tariffs promote costs exceed the agreed price, a loss contract can be considered. It can enforce immediate recognition of all forecast losses based on ASC606.
Consider American manufacturers that rely on imported materials. The new duties will be effective for some of the imports and the company will choose to absorb these additional costs. Result: This reduces profit margins and If the net feasible value is below the cost, writing may be required.
Important points: This scenario highlights why CFOs need robust features for both contract analysis and aggressive accounting adjustments, but all maintain an efficient, close process.
How CFOs navigate ASC 606 amid tariff uncertainty
To successfully navigate ASC 606 in a tariff-affected environment, CFOs need to automate the process as agile and as possible. Companies are proactive:
- Evaluate both current and future contracts for material tariff risks
- Work closely with accounting and tax teams to provide accurate input for tax impact calculations
- Calculate tariffs accurately based on delivery dates and current trade policies
- Update the price model accordingly
- Strengthen financial disclosure practices to communicate uncertainty in cash flow and revenues
Rightrev's Revenue Automation Platform helps CFOs manage these complexities by natively supporting mid-stream contract changes, multi-factor arrangements and a variety of considerations, including those caused by customs duties, without the need for customization or configuration.
“Making sure to maintain compelling and predictable revenue and unit economics is always challenging,” says Dan Miller, CFO at Rightrev. “However, the introduction of a volatile tariff regime puts more strain on CFO offices, and more strain on automating the tough process of calculating the impact of tariffs, using scalable systems and processes to close books in a timely manner, and predicting future impacts on businesses.”
Although they cannot control the broader geopolitical and economic forces, CFOs can control one important thing. Adapt the policies, processes and systems of ASC606 to explain customs duties. This allows businesses to maintain compliance and efficient financial reporting, turning this regulatory challenge into a competitive edge.
Learn more about how businesses automate revenue recognition with Rightrev.
