Turkey will carry out the first adjustment of business value for inflation in 20 years
Turkey will host the first adjustment of company financial statements for inflation since 2004. As a result, the value of company’s assets may be increased several times over their current nominal value. This will simplify access to loans and investments, experts at FinExpertiza Global have said.
In Turkey in accordance with the General Communique No. 555 of the Tax Process Law, the procedure of financial reporting submission to be added to corporate tax returns for 2023, adjusted for inflation, as well as the procedure of financial reporting preparation for the 1st quarter of 2024, which will be added to 2024 provisional tax returns to be adjusted for inflation, have been published.
Goksal Altun, Managing Partner of Adalya Denetim SMMM A.S. (member of FinExpertiza Global), explains:
1. What are the specific changes for Turkish companies and how significant are they for business?
If we evaluate the changes regarding inflation adjustment specifically, this is an important development. Because there has been high inflation in the last 3 years and the balance sheets of companies are presented with historical value, making the businesses look smaller than they are. No tax will be collected on the monetary position profit resulting from the inflation adjustment to be made until 2023, and the monetary position loss will not be deducted from the tax base. However, especially for investors and banks, when making decisions about companies (such as credit limits), balance sheets are important as they approximate the current value of the company.
The balance sheet and financial statements will become larger with inflation adjustment and will more accurately reflect the financial and financial situation of the company.
Losses that will be taxed on profits resulting from the adjustments to be made starting from 2024 will be deducted from the tax base.
2. Do all Turkish companies, without exception, have to amend their financial statements?
All companies are required to make inflation adjustments, except for banks and insurance companies and companies that are permitted by the Ministry of Finance to make accounting records in any foreign currency other than TRY. If records are kept in foreign currencies other than TRY, there must be no high inflation in the economy to which the relevant currency type belongs.
3. For what people and organizations are such changes important?
Inflation adjustment will be particularly effective for companies that have fixed assets and have invested in previous years, and for companies that have strong capital but have registered and paid their capital in previous years. The balance sheets of such companies were much lower than the real value of the company. In some companies, balance sheets may grow 10-15 times as a result of the correction. For example, the asset value of a company that has invested in a factory in 2022 will be adjusted and increase 4-5 times. This will make it easier for companies to access credit and investment.
4. Are these temporary changes or permanent?
This adjustment obligation depends on annual inflation rates. If the annual inflation rate falls below 10% and the last three-year inflation rate falls below 100%, this correction obligation will be eliminated. Therefore, it is likely that this correction practice will continue for at least the next 4-5 years.
With inflation adjustment, the following balance sheet items will be corrected by multiplying the date of recording in the balance sheet by the increase rate in the Domestic Producer Price Index on December 2023 and the subsequent correction date. These coefficients can rise up to 90 in some companies that have been operating for a long time. The last inflation correction in Turkey was made in 2004. For example, the assets of a company founded in 2000 are included in the balance sheet with 2004 prices. These assets with inflation adjustment. The values on the balance sheet will be corrected by increasing perhaps 80-90%.
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