General Price Level Adjusted Accounting does not require leaving conventional accounting out entirely which is kept according to historical values. On the contrary, it performs adjustment transaction according to conventional accounting. The difference presented by General Price Level Adjusted Accounting is that it shows balances in today's currency unit, instead of showing with historical values.
Its purpose is to show all transactions over the same purchasing power type and compare them at the end of the period. In other words, it enables to reduce TL value of different periods to purchasing power of TL valid at the end of the period and give the opportunity to compare them. In order to reduce the purchasing power of money valid on different date to the purchasing power of any period, indices referring to general price level changes are used.
When the factor (adjustment factor), which is found by dividing price index number on balance sheet date into price index number on the date when transaction (to be adjusted) is performed, is multiplied with previous amount of the transaction, the result will show the relevant transaction's value over currency unit on balance sheet date.
For example, a material purchased for 10.000TL in January, 2010 can be given in currency unit of December, 2001 as in the following data:
2001 January WPI (Wholesale Price Index) = 2686,80
2001 December WPI = 4951,70
Adjustment factor = 4951,70 / 2686,80 = 1,84
Adjusted amount = 10,000 * 1,84 = 18,400 TL
Transaction Steps
According to General Price Level Adjusted Accounting, inflation accounting consists of the following steps:
- Determining Price Indices
The selected indices must reflect the decrease in the value of money in the best way possible. CMB recommends SIS – Wholesale Price General Index that is calculated for Turkey by State Institute of Statistics.
Other available indices are SIS - Consumer Price Index, ICC – Wholesale Price General Index, ICC-Consumer Price Index etc.
- Determining Monetary and Non-Monetary Items
Monetary items maintain their nominal value against changes in the value of money, yet their purchasing power changes.
Monetary items do not require to be adjusted, because these items determine the amount of money on hand. For example, whatever the price transactions are, 100.000TL in safe deposit will remain as 100.000 TL at the end of the year.
Nominal value of non-monetary items changes when the value of money changes, yet they maintain their purchasing power. For instance, 10 materials purchased for 100.000 TL at the beginning of period will correspond to the cost of 10 materials at the end of period. However if the price of a material rises to 1500 TL at the end of period, year-end price of 10 materials will be 15.000 TL.
CMB has announced monetary and non-monetary items in the relevant notifications.
- Adjusting Non-Monetary Items
Account transactions of non-monetary items are adjusted by adjustment factors. Adjustment factor is found for each transaction by dividing year-end indices into transaction indices.
- Adjusting Fiscal Tables
Values adjusted in consideration of historical values of items which are located in fiscal tables are listed.
- Calculating Net Monetary Position
Net Monetary Position refers to the difference between monetary active and monetary passive. This difference gives loss/profit incurred for retaining monetary values during a specific period. Net Monetary Position Loss/Profit means profit and loss incurred due to inflation.
CMB has presented the relevant table in regard to net monetary position calculation in detail within the relevant notification.
- Preparing Inflation Adjustment Journal
Adjustments that will be done in accordance with General Price Level Adjusted Accounting will be kept out of accounting and will not be reflected to legal books or documents as it is announced in CMB notification. However CMB require keeping records in Inflation Adjustment Journal even if the authorities do not reflect adjustments on legal books.
In CMB notification, it is proposed that the following information will be kept in this journal:
- Business title
- Year of adjustment transactions
- Historical values of items that will be subjected to adjustment transaction
- Indices values and adjustment factors to be used in adjustment transaction
- Presumptions used in adjustment transaction
- Data concerning the calculation of variables used in adjustment transaction (Stock Turnover etc)
- Data concerning the aging of assets intended for determining adjustment factors
- Detailed breakdowns of stocks and other assets
- Other information and documents used to access to fiscal table data which that is subjected to adjustment transaction and accounting documents and data included in records
- Fiscal tables and reports of participants and subsidiaries
Capital Market Board Notification
Notification covers adjustment transactions to be performed in inflationary environments, transaction steps, exceptional situations and detailed information concerning solutions to these situations. Inflation Accounting solution is also based on notification.