Inflation Adjustment in Turkey: A Guide for Foreign Investors

What is Inflation Adjustment?

Inflation adjustment is the process of recalibrating financial statements to reflect the economic reality caused by changes in the purchasing power of the currency. In Turkey, this procedure involves adjusting the Turkish Lira (TRY) value of non-monetary assets on financial statements using specific adjustment coefficients.

For foreign investors establishing businesses in Turkey, understanding inflation adjustment is crucial to ensure compliance with local accounting standards and tax regulations.

When Does Inflation Adjustment Begin?

The implementation of inflation adjustment in Turkey is scheduled to commence at the end of the 2023 calendar year or upon the termination of specific accounting periods in 2024. This process may continue into the 2024 accounting period and beyond, depending on economic conditions.

Which Financial Statements Require Inflation Adjustment?

Inflation adjustment primarily applies to the balance sheet. Other financial statements, such as income statements or cash flow reports, are not directly subject to this adjustment.

Impact of Inflation Adjustment on Taxation

Inflation adjustment impacts taxation in the following ways:

• The profit or loss variance resulting from inflation adjustment as of December 31, 2023, will affect the retained earnings account.
• The tax base for the 2024 accounting period will be calculated based on the adjusted balance sheet.

Key Taxpayer Responsibilities

Taxpayers must complete the following steps for compliance:

1. Identify non-monetary assets.
2. Determine adjustment basis amounts.
3. Establish adjustment dates and coefficients.
4. Calculate adjusted values and record inflation differences.
5. Present financial statements reflecting the adjusted values of non-monetary assets.

Step-by-Step Process for Inflation Adjustment

Foreign investors and taxpayers must follow these sequential steps to execute inflation adjustment:

1. Identification of Non-Monetary Assets: Identify non-monetary assets in the financial statement.
2. Calculation of Adjustment Basis Amounts: Calculate the adjustment basis amounts for identified non-monetary assets.
3. Determination of Adjustment Coefficients: Establish adjustment dates and coefficients to apply the inflation adjustment.
4. Recalibration of Asset Values: Recalibrate amounts by multiplying adjustment bases with corresponding coefficients to compute the adjusted values.
5. Recording of Inflation Differences: Record the inflation differences in financial statements.
6. Preparation of the Unadjusted Balance Sheet: Prepare the unadjusted balance sheet for the 2023 accounting period.
7. Validation of the Adjusted Balance Sheet: Validate the adjusted balance sheet at the end of 2023. (The tax base for 2023 will be calculated using pre-adjustment figures.)
8. Establishment of Starting Values for 2024: Establish the starting values for 2024 based on the adjusted 2023 balance sheet. From January 1, 2024, depreciation and amortization will be calculated over the adjusted asset values.

Will Inflation Adjustment Continue in 2024?

Yes, inflation adjustment may continue into the 2024 accounting period and subsequent periods, depending on specific conditions. This includes adjustments during temporary tax periods.

For investors and businesses, the values derived from the adjusted December 31, 2023 balance sheet will serve as the starting values for 2024 and beyond.

Why Inflation Adjustment Matters for Foreign Investors

For international investors looking to establish or expand businesses in Turkey, understanding the inflation adjustment process ensures:

• Accurate Financial Reporting: Aligns with Turkish accounting standards to reflect real economic values.
• Compliance: Avoids penalties by meeting tax and financial obligations.
• Strategic Decision-Making: Provides a clear picture of asset values and profitability in an inflationary economy.

Working with a trusted CPA firm in Istanbul can streamline the inflation adjustment process, ensuring compliance and accurate financial reporting.

Partner with Us for Your Accounting Needs

At Ozbek CPA, we specialize in supporting foreign investors in Turkey with:

• Inflation adjustment processes
• Comprehensive accounting and tax solutions
• Business establishment and compliance support

Ensure your financial statements reflect the economic reality and remain compliant with Turkish regulations. Contact us today to learn how we can assist you with your accounting needs in Turkey.