What is inflation accounting?
Inflation accounting is characterized by multiplying non-monetary items on companies’ financial statements by the applicable adjustment coefficient to reflect the purchasing power on the date the financial statements are prepared.
Why is inflation accounting important?
Inflation accounting allows the financial statements of companies operating in highly inflationary economies to calculate the amount of loss or gain they face due to their economic conditions. In particular, it also ensures that companies’ assets, which fail to reflect their fair value due to high inflation, are included in the financial statements at more realistic values, thus providing more accurate information to financial audiences.
Automating inflation accounting restatements by using the most advanced tools available ensures that calculations will be standardized throughout the process. In addition, it reduces the time that tends to be spent on repetitive calculations.
Although these calculations can be made on other formats such as excel templates, digitized and automated tools reduce the margin of error to zero and provide essential standardization throughout the process of calculating.
All companies established in Turkey will need to apply inflation accounting according to legal regulations in force.
TAS 29 does not define an exact ratio to confirm the incidence of high inflation. The issue of when it will become necessary to correct the financial statements in accordance with this standard is discretionary. The determination that a country has high inflation will be made in reference to economic matters, including, but not limited to, the following: (TAS 29.3)
(a) The majority of the population prefers to keep their wealth in non-monetary assets or in a relatively stable foreign currency. Local cash is immediately invested in goods to protect purchasing power.
(b) The majority of the population does not value monetary amounts in local currency, but in a more stable foreign currency relative to the local currency.Prices can also be determined in this foreign currency;
(c) Prices in sales and purchases on credit; purchasing power over the loan period, even if the period is short. determined to cover expected losses;
(d) Interest rates, wages and prices are linked to a ‘price index’ and;
(e) The cumulative inflation rate for the last three years is approaching or exceeding 100%.
All entities reporting in the currency of the same hyperinflationary economy apply this standard from the same date. This standard is applied to the financial statements of all entities from the beginning of the reporting period in which hyperinflation is detected in the reporting currency country (TAS 29.4).
Companies operating in highly inflationary economies tend to show fictitious profits because the profits shown on their financial statements will be much higher than their actual profits. These fictitious profit figures can have negative effects on companies, especially due to higher corporate taxes and profit distribution. This is sometimes referred to as an ‘inflation tax’ added to corporate taxes paid by companies. These high levels of tax or dividends paid on fictitious profits can impact company equity levels negatively.
Before applying TAS 29 in their financial statements, there are some preliminary steps that companies operating in a highly inflationary economies need to take:
