What Is Inflation Accounting and How Is It Applied?
What Is Inflation Accounting and How Is It Applied?
Definition of inflation accounting
Inflation accounting is an accounting technique aimed at arranging financial statements by taking into account the loss of purchasing power caused by inflation. Inflation is an economic process that leads to a decrease in the value of money over time. This situation can make it difficult for a company’s financial data to reflect reality accurately. Inflation accounting seeks to eliminate this effect.
Within this scope, a company’s assets, liabilities, and income and expense items are updated using certain coefficients. As a result, financial statements gain a healthier and more comparable structure that is free from the effects of inflation.
Inflation accounting implementation process
In Türkiye, inflation accounting is carried out based on the General Price Level Accounting method. The implementation process mainly consists of the following stages:
- Identifying non-monetary items included in the financial statements,
- Determining the acquisition dates of these items,
- Calculating the inflation adjustment coefficient between the relevant periods,
- Updating the related amounts by multiplying them by the determined coefficient.
Importance of inflation accounting
In periods of high inflation, it becomes quite difficult for financial statements to reflect the real economic position of a business. Through inflation accounting, financial data is purified from the misleading effects caused by price increases. This allows businesses to perform more accurate analyses and make sound financial decisions.
In addition, with this practice, a company’s annual profit is calculated excluding the impact of inflation. Accordingly, tax calculations are based on a fairer foundation. Since profitability does not appear higher than it actually is, unnecessary tax burdens are avoided, and investors can evaluate companies based on realistic financial results.
Entities required to apply inflation adjustment
The following taxpayers are required to apply inflation adjustment:
- Businesses that determine their profits according to the balance sheet basis (joint stock companies, limited liability companies, general and limited partnerships, and cooperatives),
- Newly established businesses. There is no distinction between businesses established before December 31, 2023, and those established during periods when inflation adjustment is applicable. Financial statements of newly established businesses are also subject to inflation adjustment.
Entities not required to apply inflation adjustment
The following individuals and businesses are outside the scope of inflation adjustment:
- Those who keep their accounting records in a currency other than Turkish Lira,
- Businesses that previously kept records in foreign currency and later switched to Turkish Lira, provided that less than three years have passed since the transition,
- Those who keep books on an operating account basis and self-employed professionals; these groups apply inflation adjustment only to depreciation items.
Inflation accounting calculation method
Under this method, a company’s assets and liabilities are updated by taking inflation rates into account based on their nominal values. The adjustment can be made either by multiplying by the inflation rate or by using a price index.
Generally, a base year is determined, and values are revised using index figures for the relevant periods. The inflation index represents changes in price levels, and by applying this index, the current values of assets and liabilities are calculated.
Conditions for applying inflation accounting
Certain conditions must be met for inflation accounting to be applied. Accordingly:
- The increase in the price index (Yİ-ÜFE) must exceed 100% over the last three accounting periods, including the current period, and
- The increase in the price index during the current accounting period must be more than 10%.
If these conditions are met, businesses are required to subject their financial statements to inflation adjustment.
