Manufacturing Through Trade Uncertainty: Year-End Accounting and Operational Strategies

As manufacturers close the books on another challenging year, they face a complex convergence of pressures unlike any in recent memory. Traditional year-end considerations, inventory valuation, and operational efficiency, now intersect with an unprecedented level of trade policy uncertainty. Tariffs that were once a minor line item have become a significant factor in cost structures, margin calculations, and financial reporting accuracy.

For manufacturing and distribution companies, the stakes have never been higher. Getting inventory valuation right isn’t just about compliance with accounting standards; it’s about preserving cash flow and maintaining the financial flexibility needed to weather ongoing trade volatility. The companies that approach year-end with a comprehensive strategy, one that addresses both the technical accounting requirements and the broader operational implications of tariff-driven cost increases, will be best positioned to navigate whatever lies ahead.

This isn’t a challenge that any single department can tackle alone. The intersection of tariffs, inventory accounting and operational strategy requires coordination across finance, accounting, procurement, and operations teams. And it requires action before the year-end close process begins in earnest.

The New Reality: Tariffs as a Material Cost Factor

For many manufacturers, tariffs were once a minor percentage add-on to certain imported materials that didn’t significantly move the needle on overall cost structures. That reality has changed. Today’s tariff environment features higher rates, broader application across product categories, and a level of unpredictability that makes planning difficult. What were once manageable cost increases have become material factors that can make or break product profitability.

Understanding what tariffs actually are is the first step toward managing them effectively. Tariffs are duties imposed on goods imported from foreign countries, typically calculated as a percentage of the product’s declared value and paid when goods clear customs. Unlike sales taxes or other consumer-facing charges, tariffs function as a cost of acquiring inventory. They’re paid by the importing business and represent a direct increase in what it costs to bring products or materials into the country for use or resale.

The impact varies dramatically by industry and product mix. Manufacturers relying on imported steel and aluminum, electronic components, plastics and resins, or specialized chemicals have seen some of the most significant cost increases. Even companies that source primarily domestically aren’t immune. Tariffs on imported manufacturing equipment, replacement parts, and maintenance supplies affect capital expenditure budgets and operational costs across the board.

What makes the current environment particularly challenging is the uncertainty factor. Trade policies can shift with relatively little warning, leaving manufacturers who have locked in long-term pricing with customers suddenly facing margin compression they hadn’t anticipated. Supply chain teams that have spent years optimizing sourcing strategies now find themselves scrambling to evaluate alternatives, often with limited time to vet new suppliers or assess the quality and reliability of substitute materials.

The Accounting Foundation: Proper Treatment of Tariff Costs

Before diving into year-end planning strategies, it’s essential to understand how tariffs should be treated under U.S. Generally Accepted Accounting Principles (“GAAP”).

The Accounting Standards Codification (“ASC”) Topic 330 on Inventory establishes the foundational principle: all costs necessary to bring inventory to its present location and condition should be capitalized as part of inventory cost. This isn’t limited to the invoice price you pay your supplier. It includes freight-in charges, handling costs, and crucially for our purposes, import duties and tariffs. These costs are an integral part of what you’ve invested to acquire inventory that’s ready for use or sale.

This means tariffs should not be expensed as incurred. When you receive a tariff invoice or pay customs duties, that cost should be added to the value of the inventory you’re importing, not recognized immediately as an expense on your income statement. The tariff cost becomes part of your inventory asset on the balance sheet, and only flows through to cost of goods sold (“COGS”) when that inventory is eventually sold to a customer.

Why does this matter so much? Consider what happens if tariffs are incorrectly expensed as incurred rather than capitalized. Your current period expenses are artificially inflated, making your margins look worse than they actually are. Your inventory is understated on the balance sheet, potentially affecting debt covenants or other financial metrics. And perhaps most problematically, when you eventually sell that inventory, your margins will look artificially inflated because the full cost isn’t being matched against the revenue. This distortion makes it nearly impossible to accurately assess product-level profitability or make informed pricing and sourcing decisions.

The matching principle is what drives this treatment. Revenue should be matched with the expenses incurred to generate that revenue. When you sell a product, the cost of goods sold should include all the costs required to acquire or produce that product, including any tariffs paid. Capitalizing tariffs into inventory and allowing them to flow through COGS upon sale ensures this proper matching.

There’s an additional consideration for manufacturers importing equipment or materials used to construct or acquire property, plant, and equipment. Under ASC Topic 360, tariff costs associated with imported capital assets should be capitalized as part of the asset’s cost basis, not expensed immediately. This ensures the asset’s book value reflects all costs incurred to bring it to operational readiness, and those costs are then depreciated over the asset’s useful life.

The Year-End Inventory Valuation Challenge

With the accounting foundation established, we can turn to the specific year-end considerations that should be top of mind for manufacturers. The first and most critical is ensuring your on-hand inventory is properly valued under the lower of cost or net realizable value standard.

U.S. GAAP requires that inventory be carried on the balance sheet at the lower of its cost or its net realizable value. Net realizable value is essentially what you expect to receive when you sell the inventory, minus any costs to complete and sell it. In normal times, for most inventory items, cost is lower than net realizable value and no adjustment is needed. But these aren’t normal times, and the combination of tariff-inflated costs and potential market softness creates a perfect storm for possible inventory write-downs.

Consider a manufacturer who imported raw materials or components earlier in the year when tariff rates increased. Those tariff costs were properly capitalized into inventory cost. But what if market conditions have softened since then? What if customer resistance to price increases means you can’t fully pass through those higher costs? What if you’re facing competitive pressure that’s forcing you to lower prices even as your costs have risen? In any of these scenarios, your inventory cost, now inflated by tariffs, may exceed what you can realistically expect to receive when you sell products made from that inventory. That’s when a write-down becomes necessary.

The issue is particularly acute for manufacturers dealing with excess inventory accumulated during the supply chain chaos of recent years. When lead times stretched and supply became uncertain, many companies shifted from just-in-time inventory management to just-in-case stockpiling. That was a rational response to an unprecedented situation, but it’s left many manufacturers with inventory levels well above normal operating requirements. If that excess inventory includes materials acquired at tariff-inflated prices, and if market conditions have softened or product demand has shifted, you may be sitting on inventory that’s simply worth less than what you paid for it.

Slow-moving inventory poses a similar challenge. Products or materials that are taking longer than anticipated to turn may have elevated cost bases due to tariffs, but diminishing market value as they age or become less relevant. Obsolescence risk increases with holding time, and the longer tariff-inflated inventory sits, the more likely it becomes that its realizable value has declined below cost.

The year-end close process is the time to take a hard look at these issues. Finance teams need to work closely with operations, sales, and procurement to identify inventory items where net realizable value may have fallen below cost. This requires honest assessment of market conditions, realistic pricing assumptions, and careful analysis of aging and turnover patterns. It’s tempting to avoid write-downs, but carrying inventory at values higher than what it’s truly worth only delays the inevitable and distorts your financial position in the meantime.

Ensuring Complete and Accurate Tariff Capitalization

Beyond assessing whether write-downs are needed, year-end is also the time to ensure that all tariff costs associated with your on-hand inventory have been properly capitalized in the first place. This sounds straightforward, but in practice, there are several common pitfalls that can result in incomplete or inaccurate inventory costing.

One frequent issue is timing. Tariff invoices or customs documentation may not arrive simultaneously with the goods themselves. If your receiving process records inventory based on the supplier invoice but tariff costs are documented separately and later, there’s a risk those tariff costs get expensed rather than added to inventory cost. This is particularly problematic for goods received near year-end, where the timing gap between physical receipt and tariff documentation may span the year-end close.

Inconsistency is another challenge, particularly for larger organizations with multiple locations or product lines. If different facilities or divisions have different processes for handling tariff costs, you may end up with some inventory properly costed and other inventory understated. Standard cost systems can help address this, but only if the standards are regularly updated to reflect current tariff rates. If your standard costs were set at the beginning of the year before tariff increases took effect, and haven’t been updated since, your inventory costing is likely inaccurate.

The year-end close process should include specific procedures to verify that tariff costs are completely and accurately reflected in inventory values. This might include reconciling tariff payments to inventory receipts, reviewing accounts payable for outstanding tariff invoices related to received goods, and validating that standard costs used for inventory valuation include appropriate tariff components. It’s detailed work, but getting it right is essential for financial statement accuracy.

Operational Strategies: Moving Beyond Accounting Compliance

While ensuring proper inventory valuation is a critical year-end priority, manufacturers facing tariff pressures need to think beyond financial reporting. The operational decisions you make now will determine how successfully you navigate the ongoing uncertainty of the trade environment.

For many manufacturers, the most immediate operational challenge is dealing with excess inventory accumulated during the supply chain disruptions of recent years. The just-in-case stockpiling that seemed prudent when supply was uncertain now represents cash tied up in inventory, storage space consumed, and in some cases, shrinkage or obsolescence risk for perishable or time-sensitive products. When that excess inventory includes materials acquired at tariff-inflated costs, the carrying cost becomes even more burdensome.

Addressing excess inventory requires difficult decisions, each with its own financial implications. Selling at a discount can move inventory and free up cash, but it locks in margin losses and may strain customer relationships if regular buyers learn they could have waited for a better price. Disposal or write-off may be necessary for truly obsolete items, and while it results in a financial loss, it at least provides certainty and frees up resources. Donations can provide tax benefits through charitable deductions, though the benefit is generally limited to cost basis. Returning inventory to suppliers, if contractually possible, may provide the best outcome but requires negotiation and may affect future supplier relationships.

Whatever approach you take, the key is to address excess inventory proactively rather than letting it continue to consume resources indefinitely. Year-end is an ideal time to undertake this analysis because it aligns with the financial statement close and provides an opportunity to take write-downs or recognize losses in a systematic way.

Pricing Strategy and Contract Management

Tariff volatility has exposed weaknesses in many manufacturers’ pricing and contracting practices. Companies that locked in long-term fixed prices before tariff increases found themselves fulfilling orders at a loss. Those that bid competitively on projects without including provisions for cost changes discovered they couldn’t pass through unexpected tariff costs. Year-end provides an opportunity to review and revise these practices for future protection.

Building flexibility into contracts and quotes is essential in an uncertain cost environment. This might include material cost escalation clauses that allow pricing adjustments if input costs exceed certain thresholds, shorter-term pricing commitments that allow for more frequent adjustments, or explicit tariff pass-through provisions that shift the risk of tariff changes to customers. While customers may resist these provisions, absorbing unpredictable cost increases is unsustainable for most manufacturers.

When tariff costs are passed through to customers, either through price increases or explicit tariff surcharges, it’s important to treat these recoveries properly in your financial statements. Amounts collected from customers to reimburse tariff costs should be recorded as revenue, not as offsets to inventory costs or expense reimbursements. This ensures proper revenue recognition and maintains the integrity of your gross margin reporting.

Supply Chain Diversification and Optimization

Looking beyond year-end to longer-term strategy, tariff pressures are forcing many manufacturers to fundamentally reassess supply chain structures that have been in place for years or even decades. Relying heavily on suppliers from high-tariff countries may have made sense historically but may no longer be viable from a cost perspective.

Diversification strategies might include identifying alternative suppliers in tariff-exempt or lower-tariff countries, though this requires careful vetting to ensure quality and reliability aren’t compromised. Nearshoring, moving sourcing closer to home, potentially to Mexico, Central America, or Caribbean countries with favorable trade agreements, has gained momentum as a way to reduce both tariff exposure and supply chain lead times. Increasing domestic sourcing, while often more expensive on a base price basis, may prove cost-competitive when tariffs and total landed cost are considered.

These supply chain shifts take time to implement and come with their own risks and costs. Year-end strategic planning sessions should include honest assessment of supply chain vulnerability to tariffs and development of roadmaps for reducing that vulnerability over time. This isn’t a project that will be completed by year-end, but year-end is an excellent time to take stock of where you are and set direction for the coming year.

The Continuous Improvement Imperative

When external cost pressures like tariffs squeeze margins, the importance of internal efficiency improvements becomes even more acute. Continuous improvement initiatives can help offset tariff-driven cost increases through process improvements, waste reduction, and productivity gains.

The most valuable insights often come from frontline workers who interact with your processes daily. Creating channels for employees to suggest improvements and providing recognition for valuable ideas can generate a steady stream of efficiency gains that add up to meaningful margin improvement over time. In an environment where you can’t control tariff costs imposed from outside, focusing on your internal processes becomes even more important.

The Essential Role of Cross-Functional Coordination

A recurring theme throughout this discussion is that managing tariff impacts effectively requires coordination across multiple functions within your organization. This isn’t purely an accounting problem, a procurement problem, or an operations problem, it’s all of those simultaneously, and the solutions require input and collaboration from all of these areas.

Your accounting team needs to ensure tariff costs are properly capitalized and that inventory is correctly valued, but they need information from procurement on what tariffs were actually paid and from operations on inventory movement and condition. Your procurement team needs to evaluate sourcing alternatives considering tariff impacts, but they need input from finance on total cost of ownership and from operations on quality and technical requirements. Your sales and pricing teams need to develop strategies for managing tariff-driven cost increases with customers, but they need accurate cost information from accounting and realistic market intelligence.

Organizations that maintain traditional silos between these functions will struggle to develop coherent strategies for managing tariff impacts. Those that foster regular communication and collaboration across functions will be better positioned to see the full picture and develop integrated solutions that address financial, operational, and strategic considerations simultaneously.

Year-end provides a natural opportunity to bring these cross-functional teams together. The year-end close process necessarily involves coordination between accounting and operations. Extending that coordination to strategic planning discussions about how to manage tariff impacts going forward can yield valuable insights and more comprehensive solutions than any single function could develop in isolation.

A Year-End Action Plan for Manufacturing Leaders

As you move toward year-end close, what specific actions should be on your priority list? While every organization’s situation is unique, several common elements should be part of most manufacturers’ year-end planning.

On the financial reporting front, conduct a thorough review of inventory costing to verify that all tariff costs associated with on-hand inventory have been properly capitalized. This may require detailed reconciliation work, particularly for goods received late in the year where tariff documentation may lag physical receipt. Assess your entire inventory position for lower of cost or net realizable value write-downs, paying particular attention to excess, slow-moving, or obsolete inventory that may have been acquired at tariff-inflated costs. If you use standard costs for inventory valuation, verify that your standards reflect current tariff rates. If you’re recovering tariff costs from customers through surcharges or price increases, ensure those recoveries are properly classified as revenue.

On the operational side, develop a comprehensive plan for addressing any excess inventory accumulated during supply chain disruptions, including clear decision criteria for which items to sell at discount, dispose of, donate, or attempt to return. Review your pricing and contracting practices to ensure adequate protection against future tariff volatility. Evaluate your supply chain for concentration risk in high-tariff countries and develop roadmaps for diversification. Assess opportunities for continuous improvement initiatives and automation investments that can help offset margin pressure from tariffs.

Building Resilience for an Uncertain Future

If there’s one certainty about the trade environment, it’s that uncertainty will continue. Predicting specific tariff changes or trade policy shifts is effectively impossible, and manufacturing strategies built on assumptions about specific outcomes are brittle. What’s needed instead is organizational resilience, the ability to adapt quickly to whatever changes occur.

This resilience comes from several sources. Flexible supply chains with multiple sourcing options can pivot more easily than those dependent on single sources. Pricing and contracting practices that include provisions for cost changes can absorb tariff volatility without destroying margins. Strong financial positions with adequate cash reserves and access to capital provide staying power through difficult periods. Cost structures that have been continuously improved and optimized can better withstand external pressures.

Organizations that stay informed about trade policy developments and maintain scenario planning capabilities can respond more quickly to changes. This means thinking through how you would respond to various possible futures and ensuring you have the information and decision-making processes in place to act quickly when needed.

The manufacturers that will thrive through ongoing trade uncertainty are those that view it not as a temporary disruption to return from, but as a new normal to adapt to. This mindset shift is perhaps the most important strategic adjustment organizations can make.

How GreerWalker Can Help Navigate These Challenges

At GreerWalker, we recognize that managing through trade uncertainty while ensuring accurate financial reporting and optimizing tax positions requires specialized expertise across multiple disciplines. Our manufacturing and distribution practice brings together professionals from our assurance and tax service lines who work collaboratively to help clients address these interconnected challenges.

Our assurance professionals have deep experience helping manufacturers and distributors ensure their inventory accounting practices comply with U.S. GAAP requirements. We understand the nuances of properly capitalizing tariff costs into inventory, applying lower of cost or net realizable value standards in challenging market conditions, and evaluating whether inventory accounting methods are appropriate for your specific circumstances. We can assess your internal controls over inventory costing processes to identify potential gaps that could lead to misstatement. As you work through year-end close, we can provide the technical guidance and practical support needed to ensure your financial statements accurately reflect the impact of tariffs on your inventory values and operating results.

On the tax side, our professionals work closely with manufacturing and distribution clients to identify and maximize available tax benefits in the current environment. We help clients navigate the complexity of inventory accounting method choices and their tax implications. We identify qualifying activities and expenditures for the R&D credit and other available incentives that many manufacturers overlook. We provide strategic guidance on the timing of equipment purchases and capital expenditures to maximize depreciation benefits. We help clients manage estimated tax payments to preserve cash flow while remaining compliant. When clients face decisions about disposing of excess inventory, we provide guidance on the tax implications of various alternatives.

Perhaps most importantly, we take a coordinated approach that recognizes how assurance and tax considerations intersect. Your inventory valuation methods affect both your financial statements and your tax returns. The way you account for tariff costs impacts both GAAP compliance and tax deductibility. Decisions about excess inventory disposition have both financial reporting and tax consequences. By bringing together professionals from both service lines who communicate effectively and understand these interconnections, we help clients develop strategies that work from both perspectives rather than optimizing one at the expense of the other.

As you approach year-end, waiting until your books are closed to discover inventory valuation issues or missed tax opportunities means dealing with problems under time pressure with limited options. The better approach is proactive planning now, while there’s still time to gather information, evaluate alternatives, and implement strategies that position you optimally for both financial reporting and tax purposes.

We invite you to reach out to discuss your specific situation and explore how GreerWalker can help ensure your year-end close accurately reflects tariff impacts while optimizing your tax position and supporting sound operational decision-making. In an environment where complexity and uncertainty are the only constants, having experienced advisors who understand both the technical requirements and the practical business implications can make the difference between struggling through challenges and confidently navigating them.

The intersection of trade policy, financial reporting, and operational strategy is complex territory. But with the right expertise and a proactive approach, it’s navigable. Contact GreerWalker today to discuss how we can help your organization close out the current year successfully and position for whatever lies ahead.

About the Author