Inflation accounting in the stock market
After a 20-year hiatus, inflation accounting is back on the agenda! According to information Reuters attributed to the Treasury, this practice is planned to be reflected in balance sheets at the end of the year.
12punto
HOW LONG WILL THE PRACTICE BE IN EFFECT?
It is anticipated that the inflation accounting practice, which is planned to be revived, will be actively used for 3 years. However, there is a notable detail: this practice will have no effect on the 2023 tax base.
WHAT IS THE PURPOSE OF INFLATION ADJUSTMENT?
The main goal of this regulation is to correct the distortion that appears in companies' financial statements. In other words, it is to ensure that companies reflect their financial data in a more realistic and healthy manner.
HOW WILL IT AFFECT THE TAX BASE?
The new practice can affect companies' tax bases in both positive and negative ways. This means that the situation could increase or decrease a company's tax base.
WHAT IS INFLATION ACCOUNTING?
Inflation can cause fluctuations in the purchasing power of money. During periods of high inflation, certain items on balance sheets cease to reflect their true value. Elements such as fixed assets or inventory enter the balance sheet at their acquisition value and remain at that value. However, over time, inflation increases the market value of these assets. Inflation accounting brings these assets to their correct value, allowing us to see a company's true situation more clearly.
LEGAL FRAMEWORK: WHEN IS IT APPLIED?
The Tax Procedure Law specifies the conditions under which inflation accounting is applied. Specifically, inflation accounting must be applied if the PPI increase exceeds 100% over the last three years and 10% for the current year. These conditions were met in Turkey as of December 2021. However, inflation accounting was postponed until the financial statements dated December 31, 2023. As of December 31, 2023, inflation adjustment will be applied automatically.
SITUATION ASSESSMENT WITH CURRENT DATA
In the assessment made in August 2023, we see that the PPI increase over the last three years was 430% and the annual PPI increase was 49.41%. Based on this data, we can say that inflation accounting must also be applied in 2024. This practice will continue until the PPI increase falls to a single-digit figure.
FUNCTIONAL CURRENCY WARNING
Another issue to pay attention to is companies with a functional currency. If your company's accounting records are kept in a currency other than the Turkish Lira, such as the dollar or euro, inflation accounting will not be applied.