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.

In Management's Discussion and Analysis (MD&A), registrants are required to discuss their 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, registrants are required to disclose information about:

• uncertainties that will – or are reasonably likely to – result in the registrant's liquidity increasing or decreasing in any material way;
• any known material trends, favorable or unfavorable, in the registrant's 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 the registrant 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 70% of all Form 10-Q filings we examined refer to evolving tariff and trade policy in this section of the Form 10-Q.

While it does not appear many registrants have experienced material effects to their operations to date, in many cases, registrants are acknowledging that the economic uncertainty brought upon by evolving tariff and trade policy could have a material effect on their operations and financial results in the future. Disclosures commonly discuss financial strategies registrants are deploying to navigate the uncertainty, such as cost management practices, possible pricing adjustments and enhanced strategic planning. While most present this information qualitatively, some have presented quantifiable effects to revenue or earnings per share.

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 the US tariff and trade policy continues to evolve, a registrant’s risk exposure to macroeconomic effects can change. We are starting to see registrants acknowledge this in their Form 10-Q filings as they are discussing their exposure to uncertainty in this space. Disclosures discuss, for example, regulatory compliance risks and supply chain risks. Registrants have also outlined adaptation challenges they are navigating as they consider strategies to mitigate risks posed by the evolving tariff and trade policy landscape.

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.

While few of the Form 10-Q reports we analyzed disclosed quantitative financial effects from the US tariff and trade policy, many registrants are beginning to discuss qualitatively anticipated future effects from the evolving tariff and trade policy environment. For example, some registrants are expressing concern over rising costs to acquire raw materials and the knock-on effects on margins and revenues if they cannot pass costs on to customers. 

Some are acknowledging that the effects from the tariff and trade policies were immaterial in the current period but these evolving policies are expected to produce significant adverse effects in the future. Others are silent on the current-period effects but state that the policies may produce significant adverse effects in the future. Conversely, other registrants are acknowledging their limited exposure to the evolving tariff and trade policy to date and in the future.

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 with more favorable tariff and trade policy, considering alternative sourcing, and relocating production.

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.

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