Why is Inflation Accounting Important?
The main reason why inflation accounting is important and capital-valuable is to avoid the danger of capital erosion caused by non-inflationary profits. Because inflationary profits accrue taxes on non-inflationary profits and cause capital erosion through high profit distributions.
Unrealistic profitability in the financial statements can be eliminated through inflation adjustment. Inflation-adjusted assets and liabilities and profitability are shown at their real values. It enables the financial analysis necessary for the financial measurement and evaluation of the performance status.
Organizations operating in economies with high inflation apply inflation accounting in order to accurately determine the amount of loss or gain in their assets due to high inflation. This function makes inflation accounting very important and valuable.
Inflation Accounting within the Legal Framework
Inflation accounting is not only a business necessity but also a legal requirement under certain circumstances. Companies are obliged to follow the accounting standards set by bodies like the IFRS, which mandate inflation adjustments in financial reporting for economies experiencing hyperinflation.
Application in the Turkish Context
For Turkish companies, this involves adjusting assets, liabilities, income, and expenses in their financial reports to reflect current values. The adjustments are critical for providing a truthful and fair view of a company’s financial status, which is vital for investors, creditors, and other stakeholders.
Implementing inflation accounting in Turkey presents challenges, especially for businesses with international operations. The complexity of calculations and the need for consistent updates require robust accounting solutions. SAP’s Inflation Accounting software, integrated with its ERP system, offers an effective solution for Turkish businesses. It provides automated tools for adjusting financial statements in line with the legal requirements, ensuring accuracy and compliance.
Who is Obliged to Make Inflation Adjustment?
Entities operating in economies with high inflation rates are typically required to implement inflation accounting. The failure to make these adjustments can result in inaccurate financial reporting, leading to legal and compliance issues.
How is Inflation Accounting Applied?
First, non-monetary items subject to adjustment are determined. Adjustment dates are determined. The adjustment coefficient between the date when inflation accounting will be applied for the first time and the date that constitutes the basis for the adjustment is calculated. And the adjustment factor is multiplied by the amount to be adjusted,
Inflation accounting can be performed by various methods. Choosing the most effective one among these methods is the healthiest approach in terms of both time and efficiency. Especially organizations that attach importance to efficiency and productivity benefit from software solutions.