Insights Article
Get the latest insights and updates delivered to your inbox.
In the first quarter of 2025, the term “tariff” or “tariffs" was cited on 455 earnings calls conducted by S&P 500 companies—the highest number recorded in at least a decade.¹ By the fourth quarter of 2025, that figure had declined to 220, a drop of more than fifty percent from the peak.¹ The conventional reading of this decline is that companies adapted, absorbed the costs, and moved on. The forensic reading is different—and far more consequential for institutional investors.
What happened between the first quarter of 2025 and today was not adaptation. It was obfuscation at scale. Over the course of twelve months, the American tariff regime underwent a degree of upheaval without modern precedent: the imposition of sweeping tariffs under the International Emergency Economic Powers Act beginning in February 2025, a series of escalations and modifications through executive action, the United States Court of Appeals for the Federal Circuit’s ruling that IEEPA did not authorize the tariffs, and—on February 20, 2026—the Supreme Court’s 6-3 decision in Learning Resources, Inc. v. Trump holding that IEEPA does not authorize the President to impose tariffs.² Within hours, President Trump announced a replacement ten percent global tariff under Section 122 of the Trade Act of 1974, effective February 24.³ The Penn Wharton Budget Model estimates that cumulative IEEPA tariff collections reached approximately $165 to $175 billion before the Supreme Court struck them down, representing roughly half of all customs duties collected during the period.⁴
The result is not merely a trade policy story. It is an accounting complexity event of extraordinary magnitude—one that has handed corporate management teams an unprecedented degree of discretion over how costs are recognized, when recoveries are booked, and what is disclosed to investors. For institutional investors who rely on financial statements to assess the fundamental health of a business, the tariff fog is not a macroeconomic backdrop. It is an active threat to the integrity of the numbers they are analyzing.
The accounting treatment of tariffs under United States Generally Accepted Accounting Principles is deceptively straightforward in principle and enormously complex in practice. Under ASC 330, Inventory, tariffs incurred in connection with the acquisition of goods are capitalized as part of the cost of inventory—they are not expensed as incurred, and they do not qualify as “abnormal costs” that can be excluded from inventory valuation.⁵ This means that every dollar of tariff paid on imported goods during 2025 and early 2026 was folded into the carrying value of inventory on corporate balance sheets, flowing through to cost of goods sold only as that inventory was subsequently sold.
The forensic significance of this treatment is substantial. When tariffs are capitalized into inventory, they become invisible in the period they are incurred. A company that paid $50 million in tariffs during the second quarter of 2025 but did not sell the associated inventory until the fourth quarter would show no tariff impact on its income statement in Q2—and a significant margin compression in Q4 that could easily be attributed to operational factors rather than trade policy. The timing of when tariff-laden inventory flows through cost of goods sold is, within the constraints of normal business operations, a function of management judgment and inventory management practices.
This dynamic was amplified by the widespread practice of inventory frontloading. The World Trade Organization reported that United States imports surged eleven percent year-over-year in the first half of 2025, driven in significant part by companies accelerating purchases in anticipation of tariff escalation.⁶ Many firms accumulated inventory during 2024 and early 2025 specifically to create a buffer against rising input costs.⁷ That buffer served a legitimate operational purpose. It also created, for the companies that built it, a reservoir of lower-cost inventory that could be drawn down strategically to manage reported margins across multiple quarters—a form of earnings smoothing that is functionally invisible to outside investors examining only the income statement.
The lower-of-cost-and-net-realizable-value framework in ASC 330-10-35-1B adds another layer of complexity. If tariff costs are not fully recoverable through price increases, inventory must be written down to net realizable value.⁵ Determining net realizable value in a volatile tariff environment requires significant judgment about future selling prices, completion costs, and market conditions—judgment that is exercised by management, reviewed by auditors, and largely opaque to investors. Once inventory is written down, the reduced amount becomes the new cost basis and cannot be subsequently marked up, even if market conditions improve. The asymmetry of this rule creates a ratchet effect that, depending on when and how aggressively management applies it, can either front-load or defer the recognition of tariff-related losses.
Get the latest insights delivered to your inbox.
The Supreme Court’s invalidation of IEEPA tariffs created a second, and in many respects more dangerous, accounting complexity: the treatment of potential tariff refunds. With an estimated $165 to $175 billion in IEEPA-related tariffs collected and now declared unlawful, companies that paid those tariffs face the question of whether—and when—to recognize a recovery on their financial statements.⁴
The accounting guidance is ambiguous by design. Grant Thornton has noted that companies may reasonably apply one of two frameworks: the loss recovery model under ASC 410-30, which permits recognition of a recovery asset when receipt is "probable,” or the contingent gain model under ASC 450-30, which defers recognition until the gain is actually realized.⁸ The choice between these two frameworks is not merely an accounting policy election. It is a decision that determines whether tens or hundreds of millions of dollars in potential refunds appear on a company’s balance sheet and income statement now—or not at all until cash is received.
For a company whose operating performance is deteriorating, the ability to recognize a tariff refund receivable in the current period could be the difference between meeting and missing analyst consensus estimates. For a company whose results are strong, deferring recognition to a future quarter creates a reserve of unrecognized value that can be deployed precisely when it is most needed. Both choices are defensible under the applicable accounting standards. Neither choice is visible to the institutional investor examining the resulting financial statements without a detailed understanding of the company’s tariff exposure, its refund claim status, and the accounting policy it elected.
The procedural uncertainty surrounding the refund process amplifies the discretion available to management. The Supreme Court did not specify a mechanism for refunds. The Court of International Trade issued and then partially suspended an order directing Customs and Border Protection to begin paying refunds.⁹ CBP itself has stated that its current systems cannot process the volume of claims—over 53 million individual entries are affected—and is developing a dedicated processing system with a target launch of approximately 45 days from early March 2026.⁹ This procedural ambiguity gives management teams considerable latitude in determining whether receipt of a refund is "probable" under the ASC 410-30 framework, and by extension, whether to recognize a recovery asset in any given reporting period.
The intersection of tariff volatility and executive compensation presents a governance concern that institutional investors have been almost entirely silent about. Pay Governance, in a recent analysis published by the Harvard Law School Forum on Corporate Governance, noted that many companies likely established their 2026 annual and long-term incentive plan targets before the Supreme Court’ February 20 ruling—meaning those targets may incorporate tariff costs that could now be refunded.¹⁰ If the tariffs that were baked into 2026 targets are reversed through refunds, the targets may become artificially easy to achieve, resulting in windfall compensation payouts that reward neither operational performance nor management skill.
The dynamic operates in the opposite direction as well. Dsuring 2025, some companies found that the threat of tariffs actually accelerated customer orders, resulting in higher-than-expected sales and profits—a phenomenon that Pay Governance noted created its own set of complications for determining whether incentive plan adjustments were warranted.¹⁰ The question for institutional investors is whether compensation committees are exercising genuine independence in evaluating tariff-related adjustments to performance targets, or whether management is selectively characterizing tariff impacts—as headwinds when seeking target relief, and as tailwinds when reporting results—in ways that maximize personal compensation regardless of underlying operational trajectory.
This is not a theoretical concern. It is a direct extension of the same incentive misalignment that Buxton Helmsley has documented in the context of share repurchase programs and non-GAAP earnings adjustments. The tariff environment has simply added a new variable to the equation—one that is more volatile, less transparent, and harder for outside investors to independently verify than any financial metric previously used as a basis for performance-based compensation.
Under Regulation S-K, public companies are required to disclose specific risk factors (Item 105) and to discuss known trends and uncertainties in Management’s Discussion and Analysis (Item 303). Separately, ASC 275 requires disclosure of concentrations that make the company vulnerable to the risk of a near-term severe impact.¹¹ In an environment where the average effective United States tariff rate climbed from roughly 2.2 percent at the start of 2025 to 10.3 percent through January 2026—a level not seen in decades—and where a Supreme Court ruling has now introduced the possibility of refunds worth billions of dollars in the aggregate, the materiality threshold for tariff-related disclosure has been met for virtually every company with significant import exposure.⁴
Yet the quality of tariff-related disclosure across the S&P 500 remains strikingly uneven. Many companies have provided only boilerplate risk factor language acknowledging that tariffs “could” affect results, without quantifying the actual impact on inventory costs, margins, or forward guidance. Few have disclosed the specific accounting policy elected for treatment of potential IEEPA refunds. Fewer still have provided the granularity necessary for an institutional investor to model the tariff-adjusted trajectory of the business—information such as the dollar amount of tariffs capitalized into current inventory, the company's import exposure by country and tariff category, or the status of any refund claims filed with Customs and Border Protection.
For the forensic investor, what a company chooses not to disclose about its tariff exposure is often more informative than what it does disclose. A company that provides detailed, quantified tariff impact analysis is making a statement about its governance posture and its willingness to subject itself to investor scrutiny. A company that buries its tariff exposure in a single sentence of boilerplate risk factor language, while simultaneously reporting stable margins in a period of historically elevated import costs, is making a different statement—one that warrants significantly deeper investigation.
At Buxton Helmsley, our approach to financial statement analysis has consistently emphasized that the most consequential risks are found not in the numbers themselves but in the gap between what the numbers report and what the underlying economic reality supports. The current tariff environment presents precisely this kind of gap, and the forensic indicators for identifying companies that may be exploiting tariff complexity to manage earnings are both specific and actionable.
The first indicator is the relationship between inventory levels and revenue trends. A company that built significant inventory in early 2025 to buffer against tariff costs should, by now, be drawing that inventory down. If inventory levels remain elevated relative to revenue—or if the inventory-to-sales ratio has increased—the forensic investor should investigate whether the company is selectively deferring the sale of higher-cost, tariff-laden inventory to avoid margin compression in the current period.
The second indicator is the trajectory of gross margins relative to disclosed tariff exposure. A company that imports a significant portion of its inputs from countries subject to tariffs of twenty-five percent or more, yet reports stable or improving gross margins without a corresponding increase in selling prices, is presenting a result that demands explanation. The explanation may be legitimate—hedging, sourcing diversification, or the drawdown of pre-tariff inventory. Or it may reflect aggressive accounting judgments about inventory valuation, cost allocation, or the timing of tariff cost recognition.
The third indicator is the treatment of potential IEEPA refunds. The forensic investor should examine whether the company has disclosed its elected accounting framework for refund recognition (ASC 410-30 versus ASC 450-30), the dollar amount of IEEPA tariffs paid, and the status of any refund claims. A company that has recognized a material refund receivable on its balance sheet—particularly one whose operating results would have missed consensus estimates without the receivable—warrants scrutiny regarding whether the “probable" threshold under ASC 410-30 has genuinely been met given the procedural uncertainty that persists as of the date of this publication.
The fourth indicator is the structure of executive compensation adjustments. Proxy statements filed in 2026 will reveal whether compensation committees made adjustments to incentive plan targets to account for tariff impacts. The forensic investor should evaluate whether those adjustments are symmetric—that is, whether both favorable and unfavorable tariff effects have been excluded from performance measurement—or whether management has selectively characterized tariff impacts to maximize compensation outcomes.
The fifth indicator is the quality and specificity of tariff-related disclosures in MD&A and risk factor sections. A company that provides quantified, granular disclosure of its tariff exposure is providing institutional investors with the information necessary to independently assess the tariff-adjusted trajectory of the business. A company that does not is creating an information asymmetry that, whether intentional or not, benefits management at the expense of shareholders.
The tariff environment that has characterized the past fourteen months is, by any measure, the most complex and volatile trade policy landscape that American public companies have navigated in modern history. The Supreme Court’s invalidation of IEEPA tariffs, the imposition of replacement tariffs under Section 122, the prospect of up to $175 billion in refunds flowing through an administrative process that does not yet fully exist, and the ongoing threat of further tariff actions under Section 301 and Section 232 investigations have created a financial reporting environment in which management discretion is at its apex and investor visibility is at its nadir.
This is not a policy article. Whether tariffs are wise or unwise, necessary or counterproductive, is a question for elected officials and economists. The question for institutional investors is narrower and more urgent: are the financial statements they are relying upon to make capital allocation decisions faithfully representing the economic reality of the businesses they own? In an environment where the accounting standards governing tariff costs, inventory valuation, and refund recognition afford management teams extraordinary latitude—and where the disclosure framework provides limited transparency into how that latitude is being exercised—the answer cannot be assumed. It must be verified.
The companies navigating this environment with integrity will welcome that verification. The companies exploiting the tariff fog to obscure deteriorating fundamentals, manufacture earnings, or inflate executive compensation will not. For institutional investors, distinguishing between the two is not optional. It is the work.
Get the latest insights delivered to your inbox.
Referenced Sources
[1] FactSet, "Number of S&P 500 Earnings Calls Citing ‘Tariffs’ Declined for 3rd Straight Quarter" (March 2026). The term "tariff" or "tariffs" was cited on 455 S&P 500 earnings calls in Q1 2025 (the record over the past ten years using current index constituents), declining to 267 in Q3 2025 and 220 in Q4 2025—the third consecutive quarterly decline.
[2] Learning Resources, Inc. v. Trump, No. 24-1287, slip op. (U.S. Feb. 20, 2026). The Supreme Court held 6-3 that IEEPA does not authorize the President to impose tariffs, concluding that the power to impose tariffs is “very clear[ly] … a branch of the taxing power” reserved for Congress under Article I of the Constitution. The Court affirmed the United States Court of Appeals for the Federal Circuit’s August 2025 en banc ruling, which had characterized the IEEPA tariffs as “unbounded in scope, amount, and duration.”
[3] Holland & Knight LLP, “Supreme Court Strikes Down IEEPA Tariffs: What Importers Need to Know Now” (February 20, 2026), noting that within hours of the Supreme Court's ruling, President Trump announced the imposition of ten percent global tariffs under Section 122 of the Trade Act of 1974 and the launch of trade investigations under Section 301 of the Trade Act of 1974 that could lead to additional future tariffs. Existing tariffs under Section 232 of the Trade Expansion Act of 1962 remain in effect and are unaffected by the ruling.
[4] Penn Wharton Budget Model, “Supreme Court Tariff Ruling: IEEPA Revenue and Potential Refunds” (February 20, 2026), projecting that reversing the IEEPA tariffs will generate up to $175 billion in refunds and estimating that IEEPA tariffs represented approximately half of total customs duties collected. The effective United States tariff rate of 10.3 percent through January 2026—up from roughly 2.2 percent at the start of 2025—is derived from Penn Wharton data as reported by EBC Financial Group, “How Are Tariffs Affecting Inflation and Stock Markets in 2026?” (March 2026).
[5] FASB ASC 330-10-30-1 and ASC 330-10-35-1B; PwC, “Accounting Implications of Tariffs” (March 2026), noting that tariffs represent a cost incurred to bring an article to its existing location and are included in the acquisition cost of inventory, and that additional tariffs or changes in tariff rates do not represent “abnormal costs” under ASC 330-10-30-7.
[6] World Trade Organization, “Frontloading, Measured Responses Cushion Tariff Impact in 2025 but Risk High for 2026” (August 8, 2025), reporting that U.S. imports surged eleven percent year-over-year in volume terms in the first half of 2025 due to frontloading and inventory accumulation, including a fourteen percent quarter-over-quarter increase in Q1 followed by a sixteen percent drop in Q2.
[7] EBC Financial Group, “How Are Tariffs Affecting Inflation and Stock Markets in 2026?” (March 2026), noting that many firms accumulated inventory during 2024 and early 2025 in anticipation of tariff increases, a strategy that temporarily delayed price pass-through but was no longer viable by 2026.
[8] Grant Thornton LLP, “Accounting Implications of SCOTUS Tariffs Ruling” (March 2026), discussing the two accounting frameworks available for recognizing IEEPA tariff refunds: the loss recovery model under ASC 410-30 (permitting recognition when receipt is “probable”) and the contingent gain model under ASC 450-30 (deferring recognition until realized). Grant Thornton noted that a reporting entity applying ASC 410-30 by analogy may only recognize an asset related to an anticipated refund to the extent of previously recognized tariff costs.
[9] Morgan Lewis & Bockius LLP, “IEEPA Tariff Refund Uncertainty After Supreme Court Decision: Retailers Face Disclosure and Litigation Risks” (March 2026), reporting that on March 4, 2026, CIT Judge Richard Eaton issued an order directing CBP to begin paying refunds immediately, but that following a closed-door hearing on March 6, the court suspended the “immediate compliance” portion of the order after CBP stated that its Automated Commercial Environment system cannot handle the volume of refunds to over 53 million entries. CBP is developing a dedicated processing system (CAPE) with a target launch in approximately 45 days.
[10] Pay Governance LLC, “Impact of Tariffs on 2025 and 2026 Incentives,” published by the Harvard Law School Forum on Corporate Governance (March 16, 2026), noting that many companies may have already established their 2026 incentive plan targets before the tariff refund possibility emerged and were unlikely to have considered such an impact when setting those targets, and that some companies found tariffs had a net positive impact on 2025 results as the threat of tariffs accelerated customer orders.
[11] Wolters Kluwer, “Discussion and Analysis of Current Accounting and Reporting Issues Related to Tariffs” (May 2025), and RSM US LLP, “Accounting Brief: Financial Reporting Implications of Tariffs” (April 2025), discussing the disclosure requirements under Regulation S-K Items 105 and 303, and ASC 275 concentration disclosures, as they apply to tariff-related risks and uncertainties.
This article is published by Buxton Helmsley USA, Inc. for informational and educational purposes only. It does not constitute investment advice, a solicitation, or a recommendation to buy or sell any security. The views expressed are those of Buxton Helmsley and are based on publicly available information as of the date of publication. Investors should conduct their own due diligence and consult with qualified professionals before making investment decisions.
Insights and updates delivered directly to your inbox.