Inflation and devaluation effects on financial statements

Anotace: Turkey has had another year of high inflation and high devaluation in its economic history. This has had negative consequences on growth and the future prospects of the country. This paper analyses the consequences of high inflation and the devaluation rates on financial statements. Inflation and devaluation create difficulties for both local companies and foreign subsidiaries in terms of financial reporting. A model company’s transactions have been used to show the effects of inflation and devaluation on financial statements. The application of different IAS based reporting methods will create discrepancies for companies and especially foreign subsidiaries will be the ones most affected. Those who apply IAS 29 will have less loss and pay local taxes compared to companies who apply IAS 21 based reporting where no taxes are paid due to the considerable amount of losses. On the other hand, local companies not applying any of these rules will pay the highest amount of taxes, since the government did not request the restatement of financials based on IAS 29. The unclear rules create discrepancies on financial reporting and unbalanced competition. This paper purports that IAS 29 application will lead the financial statements to be presented fairly both for local and foreign subsidiaries in Turkey for the year of 2018.