Tariff Refunds: A Tale of Two Accounting Approaches

Last month we looked at the prickly issue of how companies are accounting for tariff costs. The accounting questions on the other side of that ledger—what do you do when you might get your money back?—turn out to be equally thorny.

After the Supreme Court’s February ruling invalidating IEEPA tariffs, many companies found themselves in line for potentially large refund payments. Subsequent Court of International Trade decisions have confirmed that refunds are due from U.S. Customers and Border Protection. With CBP having only launched Phase 1 of its CAPE refund portal, the refund mechanics are not a finished product.

With that uncertainty as a backdrop, two approaches to accounting for refunds have emerged. The first draws on ASC 410-30, the accounting standard for environmental liability recoveries. The logic: if a company already recognized tariff costs, it can look to those recovery principles by analogy to determine whether it can now recognize a receivable.

On that front, the key test is probability. The probability threshold comes from ASC 450-20’s loss contingency framework, under which the recovery needs to be “likely to occur.” Importantly, the refund does not have to be a sure thing, but companies need to weigh the complexity of the refund process, their eligibility, and management’s actual intent to pursue a claim.

Under this model, a company compares the amount of any (probable) recovery against the tariff costs it previously recognized. Recognition is capped at those prior costs. Deloitte has flagged this as its preferred model—though it also acknowledged another defensible choice.

That alternative is the “gain contingency” model. Companies using this approach hold off on any recognition until the money is effectively in hand. That is, they don’t record anything until all contingencies are resolved.

Flowers Foods laid it out plainly in its May 21 10-Q: “the company’s current accounting policy is to account for any such tariff refunds by applying the gain contingency accounting model. Accordingly, the company will recognize any IEEPA tariff refunds when all contingencies have been resolved and the gain is realized or realizable.” In its own May 21 10-Q, e.l.f. Beauty took the same position, writing that too much remained uncertain—including whether the government would appeal the CIT’s order, how costs would actually be recovered through CBP, and when any of it might happen—to record a receivable.

Other companies have had enough clarity to move forward. John Deere disclosed in a May 21 8-K that it recorded a $272 million recovery for refund claims that had been filed and accepted by CBP, a concrete basis for recognition.

VF Corp has also put its refund on its books. In a fulsome MD&A section in its May 20 10-K, the company disclosed it had paid $149.7 million in IEEPA tariffs and, after the March CIT ruling requiring CBP to issue refunds with interest, recorded the full amount as a receivable. VF recognized $93.8 million as a reduction to cost of goods sold, with the remaining $55.9 million sitting in inventory to be recognized as inventory is sold. The company also recorded a $37.6 million liability for amounts it has committed to reimburse certain vendors and partners once the refunds come in.

As CBP works through the mechanics of processing refunds, companies will continue to update their accounting. The filings so far suggest a fair degree of caution, although John Deere and VF Corp show that even now, recognition is the right choice for some. A key takeaway for companies and investors, tariff refund accounting may become an area of increasing scrutiny, with disclosure quality and consistency likely to matter as much as the accounting treatment itself.

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