What Is Inflation Accounting?
What Is Inflation Accounting?
Inflation accounting is a financial reporting method that adjusts a company’s financial statements to reflect the impact of inflation, ensuring a more accurate and consistent presentation of economic reality. Since inflation reduces the purchasing power of money over time, it can distort a business’s financial data. Inflation accounting is used to correct these distortions and present financial information more reliably.
Through this approach, non-monetary items such as assets, liabilities, and income figures are restated to account for changes in price levels. As a result, financial statements provide a clearer and more realistic view of a company’s actual position.
How Is Inflation Accounting Applied?
In Türkiye, inflation accounting is performed using the “general price-level accounting” method. The process typically consists of the following steps:
- Identifying the non-monetary items in the financial statements,
- Determining the original dates related to these items,
- Calculating the adjustment coefficient based on the difference between the original date and the adjustment date,
- Updating the relevant amounts by multiplying them with the adjustment coefficient.
Why Is Inflation Accounting Necessary?
Accurate financial analysis depends on financial statements that truly represent economic conditions. In periods of high inflation, inflation accounting becomes essential to prevent distorted figures and support sound financial decision-making.
By eliminating the effect of inflation, a company’s annual profit can be calculated more accurately. This also ensures proper taxation based on real, inflation-adjusted earnings. As a result, businesses avoid unnecessary tax burdens, and investors benefit from more reliable financial information.
Who Must Apply Inflation Adjustment?
The following entities are required to apply inflation adjustment:
- Businesses whose income is determined according to the balance sheet method (corporations, limited companies, joint partnerships, collective companies, and cooperatives),
- Newly established businesses. Regardless of whether they were founded before or after December 31, 2023, all new enterprises must apply inflation adjustment.
Who Is Exempt from Inflation Adjustment?
The groups listed below are not obligated to perform inflation adjustment:
- Entities whose accounting records are kept in a foreign currency,
- Businesses that previously kept records in a foreign currency and switched to TRY, but for whom three years have not passed since the transition,
- Taxpayers using the operating ledger method and self-employed individuals (they are only required to adjust depreciation).
How Is Inflation Accounting Calculated?
In inflation accounting, the nominal values of assets and liabilities are updated using an inflation rate or a designated price index. This may involve:
- Applying the inflation rate as a multiplier,
- Adjusting values based on a selected base year,
- Restating amounts using a price index such as the Domestic Producer Price Index (D-PPI / Yİ-ÜFE).
Through these methods, the values in the financial statements are recalculated to reflect changes in price levels accurately.
Conditions for Applying Inflation Accounting
Inflation accounting must be applied when the following conditions are met:
- The cumulative increase in the D-PPI (Yİ-ÜFE) over the last three fiscal years — including the current year — exceeds 100%,
- The increase within the current fiscal year alone is greater than 10%.
When both conditions occur, companies are required to restate their financial statements accordingly.
