The balance sheet dated 31.12.2023 and afterwards will be subject to inflation accounting in Turkey, upon some conditions.
What are the conditions of inflation accounting in Turkey?
Since the Rep. Article 298/A of the Tax Procedure Code is in force; during quarterly provisional (temporary) corporate income tax periods, it shall be evaluated whether the following two conditions have been met:
1- Increase in the price index for the last 36 month period shall be greater than %100
2- Increase in the price index for last 12 month period shall be greater than 10%
When inflation accounting has to be done in Turkey?
If it is mandatory in any quarterly provisional corporate income tax period, inflation accounting shall be applicable in subsequent provisional corporate tax periods within the same accounting period and at the end of the accounting period.
After the 31.12.2023 inflation accounting, will the inflation accounting in Turkey be applicable for upcoming periods?
In the period following the accounting period in which inflation is obliged to be applied, the inflation accounting application will end if both 100% or 10% conditions do not occur together. This means that both the 36-month increase in index (PPI) shall be less than 100% and last 12-month increase be less than 10%. (President has the authority to increase this 10% to 25%)
Which financial statements are subject to inflation restatement in Turkey?
Taxpayers who have to make inflation adjustments only make the inflation adjustment to the balance sheet from the financial statements. Those whose accounting period is a calendar year should subject their balance sheets dated 31.12.2023 and their balance sheets at the end of the following provisional tax and accounting periods to the correction process if the correction conditions continue.
How is the inflation accounting process in Turkey?
Adjusment is the process of multiplying the historical cost (the amount to be used as the basis for adjustment) of the non monetary asset or liability by the correction coefficient. Things to know for the restatement calculations:
1- Non-monetary items assets & liabilities are identified.
2- The date, amount and coefficients to be taken into account in the restatement of non monetary items are determined.
3- Non-monetary assets are restated
4- Restatement transactions are recorded in the “Inflation Adjustment” account account used as subtotal to demonstrate the total monetary gain or loss impact in exchange for “Inflation Difference” accounts of relevant restated items.
5- The differences collected in the “Inflation Adjustment Account” for all adjustments are transferred to the profit / loss for the period to Retained Earnings as of 31.12.2023 and to Income Statement for 2024 and onwards.
Which dates to be taken as the basis for the inflation correction process in Turkey?
A- Assets to be adjusted as of the date of entry in the books: Inventories, Construction and repair progress payments over the years, Expenses for future months and years, Revenues for future months and years, Tangible fixed assets and their constituent elements, Intangible assets and their constituent elements, Assets subject to special depletion and the constituent elements of these assets, Rights and Goodwill.
B- Assets to be adjusted as of the date of purchase: Financial Assets, Securities valued at the purchase price (Stocks with foreign currency will be adjusted according to the CBRT exchange rate on the adjustment date.)
C- Assets to be adjusted as of the date of collection: Non-monetary deposits, Collaterals, and advances, Paid up capital in cash emission premiums.
D- Assets to be adjusted as of the payment date: Non-monetary deposits, Collaterals and advances, Shares purchased against cash capital.
E- Assets to be corrected as of the date of registration: Profit reserves, Capital raised from past year profits and period profit shares received against dividends (date of registration of the capital of the subsidiary company.)
F- Assets to be corrected as of the date of transfer of ownership: Securities placed as capital in kind shares purchased against capital in kind.
G- Assets to be adjusted as of the date of reservation: Non-monetary provisions.
Which amounts to be taken as basis in the restatement process of assets regarding inflation accounting in Turkey?
In the restatement process, the amounts of the assets to be subject to restatement determined on the date of restatement in accordance with the valuation provisions of the Tax Procedure Law will be taken as basis.
Accordingly;
1- The cost price of depreciable economic assets, lands, inventories.
2- Comparison values of first facility and maintenance expenses and loincloths.
3- The purchase price for the shares will be used for restatement.
How is the restatement of inventories regarding inflation accounting in Turkey?
1- The date of adjustment for inventories is the date of entry in the books.
2- In order to determine the date on which these assets are entered into the company assets , it is also necessary to know which batch the inventory entered into the company during the purchase. Otherwise, the date of adjustment may be determined incorrectly.
3- The date of posting and the cost price of the assets in the inventory of the enterprise cannot always be easily determined. In particular, there is difficulty in determining the cost of the goods manufactured by those who trade on the same type of goods and those who produce using various inputs.
4- In these cases, aggregated methods can be applied.
What are the “Aggregated Methods” when restating inventories regarding inflation accounting in Turkey?
A- According to the General Communiqué No 328 of the VUK, taxpayers will also be able to use aggregated methods in the restatement of inventories.
B- This method cannot be dispensed with for 3 years.
C- In the case of choosing the aggregated method, it is optional to deduct the unreal financing cost from the amount based on the adjustment.
D- According to the aggregated methods, the restatement process is limited only to inventories.
E- These methods are:
1- Inventory Turnover Method: It is the process of multiplying the coefficient found according to the inventory turnover rate and the inventory at the end of the period In cases where the inventory turnover rate is high, it can give healthier results.
2- Simple Averaging Method: It is the process of multiplying the average coefficient of the period and the inventory at the end of the period It is suitable for businesses whose stock turnover rate is not too low or too high.
3- Moving Weighted Average Method: The amount of the end of period inventory and the cost of goods sold during the period to be taken as the basis for inflation adjustment is multiplied by the moving weighted average coefficient.
Restatement of Liabilities & Equity regarding inflation accounting in Turkey
From equity items;
1- Capital
2- Stock Issue Premiums
3- Stock Cancellation Profits
4- Legal Reserves
5- Status Reserves
6- Extraordinary Reserves
7- Special Funds (such as fixed asset renewal fund)
8- Positive and negative differences in capital adjustment
It is included in the balance sheet withtheir adjusted values.
What variables will affect tax results regarding inflation accounting in Turkey?
A- The status of its non monetary items within the scope of the balance sheet in assets and liabilities.
B- The amount of non monetary items and their weight in terms of the total asset/liability total.
C- The status of the restatement dates of non monetary items.
D- Exposure to tax security institutions thin capital and financing expense restriction) that will depend on the total restated equity level.
What are possible tax effects of inflation accounting in Turkey?
A- Positive Effects:
1- Increased expense impact of restated non monetary asset s in 2024.
a- Fixed asset values based on updated depreciation at the beginning of 2024 period (depreciation expense to be set in 2024 over restated values).
b- Updated inventory costs at the beginning of 2024 (the possibility of writing lower net income on sale of inventory in 2024).
2- Impact on tax security institutions as a result of equity increase.
a- Increased thin capital upper limit.
b- Reduced financing expense restrictrion rate.
3- If there will be inflation accounting in 2024 (if the restatement difference of NML is higher than the restatement difference of NMA), there will be a monetary loss that can be deducted from the corporate tax base.
B- Adverse Effects:
1- Not being able to withdraw restatement differences for equity items from the balance sheet.
2- If the non depreciable assets are sold at a price below their restated value ; loss that pertains to the difference between the restated value and the pre restatement value will be non deductible expense.
3- If there will be inflation accounting in 2024 (if the restatement difference of NMA is higher than the restatement difference of NML), there will be a monetary gain that can be taxed as part of the corporate tax base.
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Feel free to reach out for expert guidance on inflation accounting, ensuring your business remains resilient and financially transparent in Turkey.
FAQ
1. What is inflation accounting in Turkey?
Answer:
Inflation accounting in Turkey is a method used to adjust financial statements for the effects of inflation, ensuring that the financial information reflects current purchasing power. This practice helps provide a more accurate picture of a company’s financial performance and position during periods of high inflation.
2. Is inflation accounting mandatory in Turkey?
Answer:
Inflation accounting is mandatory for almost all companies in Turkey. During periods of high inflation, companies are required to apply inflation accounting maintain accurate financial reporting.
3. What are the key principles of inflation accounting in Turkey?
Answer:
Key principles of inflation accounting in Turkey include restating financial statements to reflect current prices, adjusting historical cost figures, and applying the general price index to account for changes in purchasing power. This process aims to mitigate distortions caused by inflation in financial statements.
4. How does inflation accounting affect financial statements in Turkey?
Answer:
Inflation accounting affects financial statements in Turkey by adjusting historical costs to reflect current purchasing power. This adjustment impacts asset valuations, depreciation expenses, and income, providing a clearer view of a company’s financial health during inflationary periods.
5. What are the benefits of inflation accounting for investors in Turkey?
Answer:
Inflation accounting benefits investors in Turkey by offering a more accurate reflection of a company’s financial performance and position amidst inflationary pressures. It helps in making better investment decisions by providing financial statements that account for changes in purchasing power and reduce distortions in profitability.
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