Impact of Political Changes on Accounting Practices
Impact of Political Changes on Accounting Practices
Political changes do not just translate into “news”—they often evolve into tax laws, currency restrictions, inflation/interest rate hikes, compliance regulations, or country risk. With every shift, measurement and disclosure decisions within financial statements are affected: from valuing foreign currency balances under IAS 21 to disclosures and policies under IAS 1 and events after the reporting period under IAS 10. This article provides a practical “accounting” framework for dealing with political impact: What changes? Where does it show? And how to build controls that reduce risk and increase auditability.
- Start with an “Impact Map” linking political events to line items: Balance Sheet, Income Statement, and Cash Flows.
- Three typically sensitive areas: Currency (FX Gains/Losses & IAS 21), Tax (IAS 12 & VAT), and Disclosure (Notes).
- Do not delay updating policies/notes; many risks “appear” due to poor disclosure rather than poor numbers.
- Support implementation with Risk Management controls, governance, and internal audit.
1) How Does Politics Become an Accounting Impact?
Accounting impact doesn’t come from “politics” as a concept, but from its outputs: legislation, restrictions, prices, or risks. Practically, monitor these five channels:
- Legislation & Taxes: Changes in rates/exemptions/deduction rules → Reflects on VAT and Deferred Taxes.
- Currency & Capital: Transfer restrictions, floatation/official rate changes → Reprices risk and measures FX differences.
- Inflation & Interest: Economic/political decisions affecting borrowing costs and future valuations.
- Compliance & Sanctions: New requirements, fines, or trading restrictions → Liabilities/Provisions and disclosures.
- Supply Chain & Contracts: Tariffs/bans/changing terms → Cost of sales, inventory, and contractual obligations.
2) Quick Impact Map on Financial Statements
| Change Type | Expected Financial Impact | Where does it show? |
|---|---|---|
| Tax Change/Tariffs | Difference between accounting and tax profit + tax re-estimation | Income Statement + IAS 12 + Notes |
| Currency Volatility/Restrictions | FX differences and foreign balance revaluation | Balance Sheet + FX Revaluation + IAS 21 |
| High Inflation/Interest | Purchasing power erosion + change in discount rates/borrowing costs | Inflation Impact + IAS 29 (Hyperinflation) |
| Sanctions/Compliance | Potential fines or liabilities/provisions | Provision vs Liability + Disclosure in Notes |
| Political Event After Period End | Adjustment or disclosure depending on event nature | IAS 10 + IAS 1 |
3) Politics & Currency Volatility: IAS 21 & FX Differences
Political changes may generate shocks in exchange rates or restrictions on transfers. Accountably, two main points matter:
- Revaluation of Foreign Balances Before Closing: Understand the methodology of applying FX Revaluation adjustments.
- Standard Framework: Details, recognition, and presentation under IAS 21 Foreign Exchange.
When should I consider Hedging?
When exchange fluctuations become impactful on profit margins or projected cash flows, discussing hedging instruments becomes logical. See Financial Risk Management.
Deferred Tax Model - Excel File
4) Inflation/Interest & Politics: IAS 29 & Inflation Impact
Political/economic decisions may raise inflation and interest rates, reflecting on: cost of funding, future valuations, and comparability between periods.
- For direct financial visibility of the impact: Analyze interest expense and discounting.
- When reaching hyperinflation stages: Refer to IAS 29 for the concept of restating statements to maintain value.
5) Taxes & Regulations: VAT & IAS 12
Political change often precedes tax change: VAT rates, deduction rules, exemptions, or adjustments to the tax base. Here you have two paths:
5.1 VAT: Rapid & Clear Operational Impact
- Understand the basics: Tax Accounting.
- Application in entries: Ensure systems are updated for Tax Compliance with Accounting Systems.
- Important operational point when rates change: Separate the Effective Date and its impact on related invoices.
5.2 Deferred Taxes (IAS 12): “Accounting” Impact on Differences
When laws or rates change, the measurement of deferred taxes or the interpretation of temporary differences may change. Refer to IAS 12.
6) Disclosure & Policies: IAS 1, Notes & IAS 10
Many errors in dealing with political changes occur because the company updates the numbers but not the disclosures. Three references cover the majority:
- IAS 1: Rules for presentation, consistency, and comparability.
- Notes to Financial Statements: How to write the cause, method, and estimation.
- IAS 10: When to adjust statements? And when to disclose only?
| Scenario | Treatment | Reference |
|---|---|---|
| Event after period end confirming a condition that already existed | Adjusting numbers + Documentation | IAS 10 |
| New event after period end creating new conditions | Disclosure (Non-adjusting) if material | IAS 10 + Notes |
7) Fines, Penalties & Liabilities: Provision vs. Liability?
Political change may result in compliance fines, legal costs, or contractual liabilities linked to new sanctions/bans/requirements. The most important accounting decision here: Are we facing a Provision, a Liability, or a Contingent Liability?
Practical Principle to Minimize Errors
- Write the “Event Story” in two lines: What is the obligation? Why did it arise?
- Determine probability (Probable/Possible/Remote) then determine disclosure style.
- Separate actual legal expenses (OPEX) from estimated contingent liabilities.
8) Executive Controls: ERM + Governance + Audit
The best companies don’t “predict politics,” but they build a system that handles its impact quickly and with minimal noise. Three layers close the file:
- Enterprise Risk Management: Risk register + heat map + risk owner — see Financial Risk Management.
- Clear Governance: Audit committee and disclosure responsibilities.
- Tests & Controls: Internal audit verifying data sources and disclosure — see Auditing Ethics.
9) Practical Implementation Plan (7 Steps)
- Monitor & Scope Event: What items are affected? Currency? Tax? Compliance?
- Update Impact Map: Link event to Balance Sheet, Income, and Financial Statements items.
- Identify Standard/Policy: Such as IAS 21, IAS 10, or IAS 12.
- Estimate Impact (At least two scenarios): Conservative/Base, especially for currency and tax.
- Treatment Decision: Adjust or Disclose? Provision or Liability?
- Draft Disclosure: Write brief and clear Notes: Cause + Method + Sensitivity.
- Review & Control: Pass through Internal Audit before closing, then readiness for external audit.
10) Pre-Closing Checklist & FAQs
- Did you review the exchange impact? (FX Differences + IAS 21)
- Did tax changes reflect on entries and disclosure? (Tax Accounting + IAS 12)
- Is there a subsequent event needing adjustment/disclosure? (IAS 10)
- Are policies and notes drafted in an auditable manner? (IAS 1 + Notes)
- Is any contingent liability classified correctly? (Provision vs Liability)
Frequently Asked Questions
- Does every political event after period end adjust the statements? No. The decision follows the nature of the event: Adjust if it confirms an existing condition, otherwise Disclose if material—refer to IAS 10.
- How to avoid inflating currency impact? Fix a clear policy for measuring and presenting FX differences, and document the exchange rate source and measurement date—start with Exchange Rate Impact.
- Where do I explain the impact of a tax law change? In the entry and reconciliation, then in the Notes, linking it to IAS 12 if there is a deferred impact.