Tariffs, inventory accounting, and non-GAAP metrics: which non-GAAP metrics are misleading?

As companies navigate tariffs-related disclosure challenges, they should be mindful in adjusting for tariffs in their non-GAAP presentations - or risk SEC comments

Source: non-GAAP adjustments as perceived by ChatGPT.

Tariffs continue to pose unique disclosure and accounting challenges for public companies. While most companies mention tariff risks in their filings, there is no tariff-specific guidance applicable to non-GAAP presentations.

I recently had an opportunity to share my views on tariff-related disclosure with Bloomberg. According to Calbench data cited by Bloomberg, more than 60% of S&P 500 companies mentioned tariffs in their Management Discussion and Analysis (MD&A) section. However, the level of detail and impact vary among industries and among companies within those industries.

Providing tariff-related disclosure is challenging for companies because the rapidly shifting landscape of U.S. trade policy makes it difficult to assess and communicate risks with clarity or consistency. As I noted in my interview with Bloomberg:

“Companies need to strike a balance between providing sufficient disclosure to provide useful information to investors to assess future results and providing too much disclosure that will not be useful because the environment is changing so quickly,” said Olga Usvyatsky, an accounting analyst.”

However, the impact of tariffs extends beyond disclosure. According to a report by Alvarez & Marsal, the valuation of inventory is one of the key areas of accounting impacted by tariffs. Elevated inventory costs may increase the risk of impairment, triggering the need for careful assessments of net realizable value (NRV), according to the report. Moreover, companies that purchase unusually large amounts of inventory in advance to mitigate rising post-tariff prices may reduce near-term margin pressure. Yet, doing so carries risk because those inventory levels may prove excessive, triggering write-off charges if the inventory cannot be sold at or above its net realizable value.

Suppose some companies do incur material inventory write-downs caused by excessive tariff-related inventory stock-ups. The materiality of write-offs and unusual or one-time inventory purchases resulting from the tariffs may tempt some companies to exclude these charges from their non-GAAP financial measures, presenting a more favorable view of performance.

Matt Winters of the CFA Institute argued in a recent piece that companies should not—and likely will not—exclude the effects of raising prices or other tariff-related impacts from their non-GAAP financial measures because tariffs are recurring cash-based operating expenses essential to doing business. Drawing from both SEC guidance and an investor's perspective, he explains that adjusting for tariff impacts would be akin to excluding the effects of rising commodity prices, which are similarly unpredictable but real costs. Winters emphasizes that the SEC has cautioned against excluding "normal, recurring, cash operating expenses" from non-GAAP metrics, as doing so could mislead investors.

But what about inventory write-off – would excluding charges related to unusual pre-tariff purchases be allowed by the SEC rules?

I used Ideagen Audit Analytics SEC comment letters database to identify non-GAAP comment letters and manually reviewed the filings to identify those related to inventory write-offs. Based on my analysis, Corp Fin issued comments to about two dozen companies between January 2024 and May 2025, seeking clarity about why inventory-related charges are not misleading.

Importantly, unlike SEC comments that request more detailed disclosure, comments referencing Questions 100.01 or 100.04 often challenge the calculation of non-GAAP metrics. These comments can prompt companies to revise their non-GAAP accounting practices, resulting in the presentation of different—and typically lower—non-GAAP figures to investors.

Let’s look at common characteristics of the SEC reviews that challenged inventory-related non-GAAP adjustments.

• Most inventory-related non-GAAP adjustments that triggered SEC scrutiny were related to non-routine write-offs related to end-of-life or discontinued products and brands, regulatory changes such as export control or restrictions on sales of a product in certain jurisdictions, or post-Covid changes in demand, according to the disclosure;

• Generally, the comments appeared to be fact-specific and based on the nature of the adjustment and line of business, with magnitude of the adjustment given less weight as a stand-alone consideration;

• While many companies argued that the inventory-related adjustments were related to activities outside the normal course of business and thus not misleading, more than 75% of the companies in my sample agreed to remove the adjustment in future filings.

SEC comments to Newell Brands (NWL) highlight the considerations in assessing which inventory write-downs may be excluded from non-GAAP results and which cannot.

On September 9, 2024, the SEC issued a comment letter to Newell Brands, seeking clarity about the appropriateness of certain non-GAAP adjustments made in its 2023 and 2022 filings, including an $11 million inventory write-down related to regulatory restrictions on raw materials. The SEC requested that the Company explains how these adjustments complied with Question 100.01 of the SEC’s Compliance & Disclosure Interpretations (C&DIs), which cautions against excluding normal, recurring operating expenses from non-GAAP financial measures:

“We note certain non-GAAP adjustments for 2023 and 2022 include bad debt reserve related to an international customer, expenses for certain legal proceedings, and inventory reserve due to changes in raw material regulation. Please describe these adjustments to us in further detail and tell us how you considered the guidance in Question 100.01 of the C&DIs for Non-GAAP Financial Measures.”

Newell responded that the inventory write-down resulted from regulatory changes that restricted the sale of certain products in specific jurisdictions. The company had purchased inventory based on normal demand planning, but the new regulations rendered these products unsalable. Newell emphasized that although regulatory changes do happen, a restriction of this magnitude had never occurred in its history, and therefore, the write-down was unusual and non-recurring. On this basis, Newell argued that the adjustment was appropriate under Question 100.01, as it did not reflect a normal, recurring expense (emphasis added):

“Inventory reserve: In fiscal year 2023, the Company recorded a $11 million inventory write-down due to the adoption of regulatory restrictions on the sale of certain of its products in select jurisdictions. The Company purchased the inventory based on a combination of historical sales, demand planning and other factors, but the salability of such inventory was ultimately impacted by the announcement and adoption of regulations that restricted the sale of certain products beyond a stipulated date. While regulatory restrictions impacting the sale of the Company’s products do occur from time to time, a change of law that results in a one-time inventory write-down of this magnitude is an unusual and infrequent occurrence, which does not represent a normal, recurring operating cost.”

In a follow-up letter, the SEC challenged Newell’s position concerning inventory adjustments more broadly, stating that lower of cost or net realizable value adjustments—even when driven by external events—are part of normal business operations. Therefore, such adjustments should not be excluded from non-GAAP results (emphasis added):

“We have reviewed your response to comment 4. Despite the circumstances indicated in your response, credit losses related to customers and lower of cost or net realizable value adjustments to inventory appear to represent normal, recurring operating expenses necessary to operate your business as addressed in Question 100.01 of the Compliance and Disclosure Interpretations for Non-GAAP Financial Measures. In this regard, in future filings, please remove these components from your adjustment.”

However, Newell reiterated that the regulatory-driven write-down was extraordinary and that excluding it helped investors assess core performance by removing a one-time, non-cash charge (emphasis added):

“Inventory reserve: The Company respectfully disagrees with the Staff’s position to remove the non-GAAP adjustment for the write-down of inventory arising from the regulatory restrictions impacting the sale of its products. The Company believes that it is not only the nature but also the frequency and effect an item has on its underlying operating results and period-over-period comparability when determining whether an adjustment should be presented as a non-GAAP adjustment. The Company recorded this inventory write-down due to the adoption of regulatory restrictions in various jurisdictions that banned the sale of certain products containing specified substances and, in the Company’s case, rendered such items effectively unsalable in the United States. While changes in governmental regulations occur in the ordinary course of business, the Company is not aware of a similar situation, where a product ban required an inventory write-down of this magnitude, occurring in its history. The Company believes this specific inventory write-down to be a non-recurring, non-cash operating expense that has not occurred repeatedly or even occasionally and, as such, the presentation of this matter as a non-GAAP adjustment complies with the guidance in Question 100.01 of the CDIs for Non-GAAP Financial Measures. The Company therefore believes that the presentation of this write-down of inventory as a non-GAAP adjustment is appropriate.”

The SEC did not issue additional comments on the regulatory-related inventory impairment and, according to the Company’s 8-K Item 2.02 for the year ended December 31, 2024, filed February 07, 2025, Newell did not remove the regulatory-related inventory adjustment (emphasis added):

“Other adjustments

The following adjustments comprise other adjustments below: ….inventory write-down due to regulatory restrictions banning the salability of certain of the company’s products in certain jurisdictions; the portion of a tax reserve associated with prior periods that was recorded due to the outcome of a judicial ruling relating to indirect taxes in an international entity; gains/losses arising from the mark-to-market of an investment with a readily determinable fair value; loss on extinguishment and modification of debt; and an insurance recovery related to fire-related costs that were previously normalized.”

In parallel to the inquiry into Newell’s $11 million raw materials write-off, the SEC issued comments related to inventory write-downs linked to restructuring activities. Newell had excluded approximately $40 million in inventory impairments tied to the closure of manufacturing facilities and distribution centers, as well as the exit of several brands. While Newell provided detailed information about the nature of the charges and argued that these costs are directly attributable to specific restructuring or exit activities and would not have occurred absent those actions, the SEC disagreed and requested that Newell removes the adjustment in future filings (emphasis added):

“We have reviewed your response to comment 2 and note your views related to accelerated depreciation and inventory write-downs. Inventory write-downs related to your restructuring activities that result from strategic business decisions do not appear to be outside the normal course of operations. Please refer to Question 100.01 of Non- GAAP Compliance & Disclosure Interpretations. With respect to the adjustment for accelerated depreciation, while the estimated useful lives of the assets associated with the adjustment were shortened as a result of your restructuring activities, they continue to contribute to the company’s operations through the end of their useful lives and should not be excluded from your non-GAAP measures. In future filings, please discontinue making these adjustments to your non-GAAP measures.

Response: The Company acknowledges that it will remove the above-referenced adjustments for inventory write-downs and accelerated depreciation related to restructuring activities from its non-GAAP measures when and if any relevant period is presented in the future. The Company will present these changes commencing with the Company’s third quarter earnings release furnished on Form 8-K for the quarter ending September 30, 2024 and on a going-forward basis, as necessary.”

Newell reflected the change in the Q3 2024 filing by removing the adjustment, recasting the previously filed results, and explaining the change to investors:

“Change to Normalization Practice

In addition to its GAAP results, the company has provided and will continue to provide certain non-GAAP financial measures, referred to as “normalized” measures, which provide investors supplementary information helpful in understanding the company’s underlying operating performance. Commencing in the third quarter of 2024, the company changed its normalization practice. Historically, the company has excluded from normalized results inventory write-downs and accelerated depreciation charges relating to restructuring and exit activities that were reflected within its restructuring-related costs non-GAAP adjustment. Beginning in the third quarter 2024, the company no longer excludes these charges from its normalized results. These changes had no impact on reported diluted earnings per share and a negative impact of approximately $0.02 on normalized diluted earnings per share for the third quarter of 2024.”

Note that while the SEC did not explicitly accept Newell’s argument that the $11 million write-down due to unprecedented regulatory restrictions was unusual and non-recurring, it did not object or issue additional follow-up comments, allowing Newell to keep the adjustment.

Note also that the restructuring-related charge that was disallowed was almost four times larger than the regulatory-induced write-off. The key difference likely lies in the nature and frequency of the event: regulatory bans may be rare, while restructuring-related write-downs are internally driven and are part of ordinary business operations.

Let’s go back to our original question: Based on Newell’s case, would tariff-related inventory write-off comply with Question 100.01? The answer would depend on the nature of the adjustment. Yet, the answer might be different if, as part of the tariff wars, there are restrictions on the resale of certain products overseas or a sudden ban on certain imports.

(Please note that this is an opinion, not a factual statement. The author of this piece is not an attorney and cannot provide a legal opinion.)

After the paywall, I provide additional examples of companies that received SEC comments related to inventory impairments and write-offs.