Turkey switches to inflation accounting in 2024, will all Hell break loose?

TURKEY - In Brief 31 Oct 2023 by Atilla Yesilada

---

Turkish Ministry of Finance and Treasury issued a circular last week, informing all incorporated and limited liability firms that balance sheets must be adjusted according to inflation accounting rules for YE2023. In 2024, income statements, too, shall be revised in such a manner. The revised 2023 balance sheets will not affect a company’s tax liability, but in 2024 this will be the case. I admit frankly that I need to study inflation accounting rules better before I can assess the macro-impact of them, if any. Despite Turkey’s long history of chronic double digit inflation, inflation accounting was used only for one year during the IMF stand-by, which means memories are fairly rusty. I believe I had to get this Market Brief out, as incomplete as its analysis might be, because I sense inflation accounting could lead to profound implications for the commercial banking system, for large companies which issue FX denominated loans and bonds and Borsa Istanbul. The general rules of who wins and who loses from inflation accounting are well known. Companies with strong equity, fixed assets and inventories will gain. High leverage will be punished. Profits at large will decline in 2024, as these must be adjusted for inflation. A succinct summary by Reuters may be useful to highlight the scope of the upcoming revolution: “In the last two years, companies have sought to protect themselves from high inflation and those which have turned to non-monetary fixed assets are expected to receive higher profits and pay correspondingly higher taxes in 2024. "Manufacturers and traders finance investments largely with loans and add assets which are protected against inflation ... As they ar...