Inflation, one of the most popular concepts in economic literature, is an important concept that affects all layers of a society. Understanding how inflation is handled together with economic, financial and economic regulations is very critical for businesses and individuals.
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At this point, the issue of inflation accounting, which will be implemented in 2024, is also of great importance. In this article, “What is Inflation Accounting?” We will take a detailed look at the question and discuss inflation accounting practices in Turkey.
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What is Inflation? What is the Relationship Between Inflation and Purchasing Power?
Inflation refers to the increase in the general price level in an economy over a specific period. When this situation becomes permanent, it negatively affects the economy of businesses, individuals and countries. One of the most obvious effects of inflation is that it reduces the purchasing power of money.
The decrease in purchasing power is caused by price increases. For example, if the price of a good is 10 units and this price increases to 20 units due to inflation, you will have to pay more to buy the same amount of the good. In this case, the purchasing power of your money decreases.
What is Inflation Accounting? Which Companies Apply Inflation Accounting?
Balance sheet is a kind of table showing the financial status of a business, a method of analysis, performance measurement and evaluation, and it also enables companies to be evaluated economically. Inflation accounting, in its simplest definition, is the elimination of the balance sheet items of businesses from the effects of the inflation environment and is used when economic activities must be continued in a high inflation environment. In this way, the reflections of artificial changes caused by inflation on the balance sheets can be eliminated and companies’ performance and more effective data can be achieved.
Inflation accounting application is valid for types of commercial companies that declare their income by the balance sheet method. These company types can be listed as joint stock companies, limited companies, cooperatives, limited liability companies and collective companies.
When is Inflation Accounting Applied?
In Turkey, inflation accounting practice becomes mandatory according to the criteria specified in the Tax Procedure Law. Especially when the producer price index exceeds certain rates, inflation accounting becomes mandatory. However, this obligation may be postponed or changed in certain cases.
According to the relevant articles of the Tax Procedure Law in force in our country, inflation adjustment, that is, inflation accounting, is mandatory in periods when the producer price index (PPI) exceeds 10% in the current year and 100% in the last three years in total. This obligation may be postponed or its conditions and scope may be changed by another legal regulation. Because, although the conditions were met in 2021, inflation accounting was postponed until the end of 2023 with the published notification.
Within the framework of the legal legislation in our country, the principles of inflation accounting are implemented with temporary articles and regulations added to the Tax Procedure Law (VUK) in the periods when the specified conditions are met. Inflation accounting, which was implemented in Turkey in 2003 and 2004, comes into effect once again as of January 1, 2024.
How to Apply Inflation Accounting?
Inflation accounting application is made according to the standards determined by Turkish Accounting Standard 29 (TMS29). During this practice, companies prepare their adjusted balance sheets in addition to their standard balance sheets. This adjusted balance sheet includes assets whose value changes due to inflation.
Companies that keep their financial performance using the balance sheet method revaluate the value of non-monetary assets (inventories, real estate, fixed assets, etc.) in their balance sheet items at the rate of the coefficient calculated over inflation.
The inflation coefficient is determined by dividing the PPI values at the end of the previous period and the end of the current period. It is found by dividing the PPI value at the end of the current year announced by TURKSTAT by the PPI index value at the end of the previous year.
In fiscal years when inflation accounting is in effect, companies prepare an adjusted balance sheet in addition to the standard balance sheet. In the inflation accounting balance sheet, the items in the standard balance sheet are adjusted by multiplying them by the determined inflation coefficient.
Finally, it would be useful to make an important reminder. Inflation accounting balance sheet is not used in tax declarations. The profit/loss difference resulting from inflation adjustment is shown in the previous years’ profit/loss account. Thus, no tax is collected from the profit earned, and previous year’s losses are not recorded as loss.