Turkey: INFLATION ACCOUNTING

General Communiqué No. 555 on the Tax Procedures Act, published by the Tax Administration of the Ministry of Finance in the Official Gazette No. 32415 on 30 December 2023 and entered into force on the same day, established the procedures and principles of the financial statements and correction procedures subject to inflation adjustment for the end of the 2023 accounting period and subsequent accounting periods.

What is inflation accounting?

In general terms, inflation accounting is the process of adjusting or correcting the financial statements, which cannot express the real situation due to changes in the purchasing power of money, in order to ensure that they reflect the real situation.

Inflation accounting is the adjustment (increase) of the value of the non-monetary assets in Turkish lira (TRY) included in the financial statements to the value at the date of the financial statements. The adjustment shall be made by multiplying the amounts of non-monetary assets to be taken into account in inflation accounting by the adjustment coefficients.

When will inflation accounting be applied?

As of the end of 2023 calendar year (for taxpayers who are assigned a special accounting period, as of the end of the special accounting period ending in 2024), the financial statements for the 2023 accounting period should be subject to inflation adjustment. In addition, depending on the conditions, inflation adjustment will be applied for the 2024 accounting period including the provisional tax periods (the accounting period ending in 2025 for those who are assigned a special accounting period) and the following periods (provisional tax periods and accounting periods) depending on the continuation of the conditions.

Which financial statements will it be applied to?

Among the financial statements, inflation accounting will only be applied to the balance sheets.

Who is required to do the inflation accounting?

Inflation accounting is carried out by income or corporate taxpayers who determine their earnings on a balance sheet basis.

Which steps will be followed?

In inflation accounting, taxpayers must complete the following transactions/steps in order.

a) It shall be determined which of the assets in the financial statement are non-monetary assets.

b) The amounts to be taken into account in the inflation adjustment of the identified non-monetary assets (amounts subject to adjustment) are determined

c) Adjustment dates and adjustment/carry-over coefficients will be determined for the inflation adjustment of the identified non-monetary assets.

d) The determined amounts subject to adjustment shall be multiplied by the associated adjustment/carry-over coefficients, the adjusted amounts of non-monetary assets shall be calculated, and the inflation differences shall be recorded.

e) Non-monetary assets shall be presented in the financial statements at their adjusted values and monetary assets shall be presented in the financial statements without adjustment.

Monetary assets (financial assets and monetary resources) shall not be subject to inflation accounting. This is because the value of the monetary asset shown on the balance sheet also reflects the purchasing power of that asset at the balance sheet date. However, since the values of non-monetary assets (non-monetary assets and non-monetary resources) shown on the balance sheet do not reflect the purchasing power of these assets at the balance sheet date, they are subject to an inflation adjustment in order to remove the effects of inflation from the balance sheet.

In which order is the inflation accounting carried out?

Taxpayers who are obliged to adjust for inflation must proceed as follows:

a) The balance sheet for the end of the 2023 accounting period isprepared without taking into account the inflation adjustment provisions.

b) The inflation adjustment shall be applied to the balance sheet at the end of the 2023 accounting period and the tax base for the 2023 accounting period shall be calculated on the basis of the profits determined in accordance with the financial statements prior to the adjustment.

c) The balance sheet prepared at the end of the 2023 accounting period shall in any case be subject to inflation accounting.

Can inflation difference accounts be transferred to another account?

If the inflation difference accounts of the passive items resulting from the inflation adjustment are transferred to another account or withdrawn from the company in any way, they are subject to taxation in that period, regardless of the income of the periods in which the inflation adjustment is made. However, inflation differences on equity items may be offset against prior year losses resulting from the adjustment or added to capital by corporate taxpayers; these transactions are not considered as profit distribution.

What will be the accounting records related to inflation adjustments?

Inflation adjustments will be recorded in the difference accounts of the related assets and the inflation adjustment account.

When the balance sheet is adjusted for inflation at the end of the 2023 accounting period, the restatement differences arising from the restatement of non-monetary items and the equity items that need to be reset are transferred to the "Inflation Adjustment Account". The remainder of the "Inflation Adjustment Account" shall not be considered as an income or expense item and shall be transferred to the "Retained Earnings Account" or "Retained Losses Account".

The balance of the inflation adjustment account resulting from the inflation adjustments to be made in 2024 and subsequent periods will be transferred to account 648-Inflation adjustment gains/658-Inflation adjustment losses in the income statement.

What are the baseline values for the 2024 period?

The amounts calculated as a result of the balance sheet correction at the end of the 2023 accounting period will be taken into account as initial values for the subsequent period, regardless of whether inflation adjustment will be made in the following period.

Depending on the existence of inflation accounting conditions, the adjustments for the period after 1 January 2024 (from 1 January 2024) will be made on the basis of the adjusted values in the inflation-adjusted balance sheet of 31 December 2023.

In the following accounting period, depreciation and amortization will be calculated on the basis of the adjusted values.

Will inflation accounting be carried out in the 2024 accounting period?

Depending on the occurrence of the conditions for inflation accounting, the above-mentioned measures will be implemented for the 2024 accounting period starting from the temporary tax period, in which the conditions are met, and for subsequent periods (including temporary tax periods), depending on the continuation of the conditions.

Which Accounts are subject to inflation accounting?

The accounts listed in the annex to the aforementioned communiqué, which are referred to as non-monetary assets and are subject to inflation accounting, are as follows:

Non-Monetary Assets

The assets in the following list are shown with the account codes of the "uniformed chart of accounts". The assets not included in this list are treated as the closest assets in the list in terms of their type.

110         Temporarily held equity securities

150         Raw materials and supplies held in the enterprise for use in production or other activities

151         Products in the production phase that have not yet become finished products but have received a certain proportion of direct raw materials and supplies, direct labour costs and general production costs

152         Finished products obtained at the end of production activities and ready for sale

153         Trade goods taken into operation for the purpose of sale without modification

157         Products, residues and scrap not included in any of the other inventory items

159         Advances given for inventories to be purchased domestically or abroad (if the advance granted is non-monetary, it is considered a "non-monetary asset")

170         Progress payment costs

180         Prepaid expenses for future periods that should not be recognized in the corresponding expense accounts in the current period

240         Shares that are not recognised in the subsidiaries' account because they do not meet the minimum percentages required for the subsidiaries' capital share account but are intended to be held for the long term, and securities that are not shares but are held for long-term purposes or due to legal obligations or because of loss of their ability to monetize

242         Shares or partnership interests acquired by the company in order to participate directly or indirectly in the management of other companies and in the determination of company policy

245         Capital shares of subsidiaries in which the company directly or indirectly holds more than 50 percent of the capital or voting rights or at least has the right to elect the majority of the management

250         All kinds of lands and parcels owned by the company

251         Underground and aboveground installations constructed below or above ground to enable or facilitate the execution of any work

252         All kinds of buildings and their essential parts

253         All kinds of machinery, plant and equipment used in production

254         All vehicles used in business activities

255         All types of office machinery and equipment used for business operations, as well as tangible assets such as upholstery, tables, armchairs, cabinets, furniture

257         Depreciation and amortization of depreciable assets included in property, plant and equipment

258         Investments in which expenditures are made for all kinds of materials and supplies, labour and overhead expenses, which are under construction and will be transferred to the related tangible fixed asset account when completed

259         Advances given for property, plant and equipment to be acquired domestically or abroad (if the advance granted is non-monetary, it is considered a "non-monetary asset")

260         Expenditures incurred for certain legal dispositions obtained by paying a price such as concessions, patents, licenses, trademarks and titles, as well as for the authorizations granted by public authorities in certain areas such as use and benefit

261         The cash consideration, which is the positive difference between the cost incurred in acquiring an entity and the fair value of the net assets of that entity

262         Expenses incurred for the establishment of a business, the opening of a new branch or the continuous expansion of the business, which are capitalized and for which no tangible value is obtained in return

263         Capitalized expenses incurred for the creation of new products and technologies, development of existing ones and similar purposes

264         Special costs incurred for the purpose of developing or continuously increasing the economic value of the leased properties

268         Allocated amortisations for depreciable assets within intangible assets

271         Exploration costs related to exploration activities

272         The preparation and development costs (labour, fuel, repair and maintenance costs, transport costs, supply costs, material costs, etc.) incurred in open pit mining to remove the cover of the mine or to penetrate the underground mineral deposits, to establish a continuous connection between this level and the surface until the total mass is consumed, to divide the mineral deposits into parts suitable for extraction, to ensure the transport and ventilation of persons and vehicles and to transport the ore (requiring the cost of the vertical, horizontal and inclined galleries, shafts and similar works to be opened), and to carry out the drilling, cleaning, deepening and refining operations in the petroleum industry

278         Depletion allowances allocated for items that fall into the group of assets subject to special depletion

280         Prepaid expenses for future years that should not be recognized in the corresponding expense accounts in the current period

293         The surplus stock that remains in the company due to the prudent purchasing and production policy and the low turnover rate and that exceeds the annual consumption of the company

294         Inventories and fixed assets that have lost their ability to be used in the business and to be sold for various reasons and are to be disposed of

340         Advances received in advance for future deliveries of goods and services for the purpose of sale (if the advance granted is not monetary, it is considered a "non-monetary asset")

350         Advance payments received by the enterprises engaged in contracting works over the years for the realized part of the works they have undertaken

380         Share of prepaid income for future balance sheet periods of less than one year

440         Advances received by the entity more than one year prior to the delivery of goods and the rendering of services based on the purchase agreement (if the advance granted is not monetary, it is considered a "non-monetary asset")

480         Share of prepaid income for future balance sheet periods of more than one year

500         Capital: The amount of capital allocated to the enterprise or included in the articles of association of the enterprises and registered in the Trade Registry

502         Capital Adjustment Positive Differences: Positive differences resulting from the correction of the paid-in capital amount

503         Capital Adjustment Negative Differences (-): Negative differences resulting from the correction of the paid-in capital amount

520         Share Premiums: Amounts arising from the sale of newly issued shares at a premium

521         Share Cancellation Profits: The remainder of the payments offset against the cost of the cancelled shares after covering the shortfall in revenue from the share certificates issued in lieu of those cancelled certificates

540         Legal Reserves: Reserves allocated in accordance with the provisions of the law

541         Statutory Reserves: Reserves allocated within the framework of the provisions of the Articles of Association

542         Extraordinary Reserves: Extraordinary reserves whose allocation has been decided by the General Assembly in capital companies, and profits that are excluded from distribution

549         Special Funds: Legal funds that must be kept and saved in the enterprise and funds allocated for other purposes.

 

Autor: Serkan Yılmaz