Accounting and Auditing Requirements

The principle statute governing the accounting profession is currently the 1989 Law. However,
related regulations issued by the Central Bank and the Capital Markets Board are also particularly
important because they stipulate the standards on auditing, accounting and financial reporting for banks and companies registered with the stock market.

Audits for entities receiving government or investment funding including state or privately owned
investment development banks are usually performed in accordance with Generally Accepted Auditing
Standards (GAAS). Companies operating internationally also generally request their financial statements
to be audited in accordance with GAAS.


The government requires that all corporations produce an annual report, to be filed with the Trade
Registry, and due 30 days after the annual general meeting.

Companies subject to particular regulation, specifically banks and insurance companies are required
to produce quarterly and annual reports for various government agencies as well as publish their
reports in newspapers.

The law of 1989 divides accounting professionals in three categories. These categories are:

  • Independent Accountants (SM);
  • Independent Accounting and Financial Consultants (SMMM);
  • Sworn Financial Consultants (YMM).

Individual persons or entities acting as auditors for corporations and regulatory agencies must be
licensed as Independent Accounting and Financial Consultants (SMMM) or Sworn Financial
Consultants (YMM). The Ministry of Finance requires certifications, being mainly tax related, to be carried out only by Sworn Financial Consultants (YMM).

Accounting Standards


There are a number of significant differences between International Accounting Standards (IAS) and
accounting principles generally recognised under Turkish tax law.

Accounting principles applied in Turkey are derived from two separate pieces of legislation, Turkish
tax law and Capital Market Board (CMB) regulations. Only publicly traded companies are required
to apply CMB regulations in preparing financial statements. Certain items recorded in statement
prepared in accordance with CMB standards are disallowable for tax declaration purposes and the
accounting treatment is therefore different in tax declarations. Most financial statements are prepared
according to tax law and hence differ significantly from IAS.

Inflation Accounting

In Turkey, companies maintain their books of account and prepare their statutory financial
statements in Turkish Lira, in accordance with Turkish commercial practice and tax legislation. Turkish
commercial practice and tax legislation require that financial statements be prepared in accordance with the historical cost convention with the sole exception of the optional revaluation of fixed assets on the
basis of indices published on an annual basis by the Ministry of Finance. The indices themselves do not
necessarily exactly correspond to the effective rates of inflation, and the method of permitted
revaluation results in a time lag of up to one year in its recognition. The presentation of financial statements on a historical cost basis, such as described, in a period of high inflation, inevitably results in distortions in the presentation of an enterprise's financial position and results of operations.
International Accounting Standard 29 ("IAS 29"), which deals with the effects of inflation in financial
statements, became applicable, for the first time, to financial statements covering periods beginning
on or after January 1, 1990. One characteristic that necessitates the application of IAS 29 is a
cumulative three year inflation rate approaching or exceeding 100%. Inflation in Turkey in 1993 was 60.5% and the cumulative rates have been 312% and 291% for the three years ended 31 December 1993 and 31 December 1992 respectively, based on the countrywide wholesale price index announced by the Turkish State Institute of Statistics. IAS 29 requires that financial statements prepared in
accordance with Statements of International Accounting Standards, be stated in terms of the measuring unit current at the balance sheet date and corresponding figures for previous periods be restated in the same terms by applying a general price index.

Although the application of inflation accounting provides a fair representation of an enterprise's
financial position and results of operations for companies' management, shareholders and related persons,
the application of IAS 29, or any adjustment of financial statements for the effects of inflation is
neither envisaged nor required by Turkish commercial and tax legislation, except for the optional
revaluation process for fixed assets discussed above.

Foreign Currency Transactions

Generally, all foreign currency transactions entered into by a company are translated into local
currency at the exchange rate ruling on the date the transaction occurs. Foreign currency denominated
assets and liabilities in the accounts of individual companies are translated at closing rates.

No consolidation or equity accounting is used for investments in foreign subsidiaries and equity
participations. Investments denominated in foreign currency are translated at historical rates. Income for
such investments is accounted for on a cash basis.

In accounting for forward exchange contracts, the forward rates are used as the basis in recording
transactions and translating monetary items.

Exchange losses resulting from the translation of borrowings denominated in foreign currency may
be included either in the costs of assets financed by the borrowings or in profit and loss accounts. In
the case of inventories, foreign exchange losses may be, and in certain cases, have to be, included in
the cost of inventories. It is permitted to include foreign exchange losses, incurred on long-term debt
used to finance capital expenditure, in the cost of related fixed assets even after the assets are placed in
use. Capitalised foreign exchange losses are depreciated over the remaining depreciable life of the

Recognition of Income and Expenses

Under tax law, revenues and expenses are recognised only upon receipt of an invoice or, in the case
of certain employee liabilities, when paid. CMB regulations require all revenues and expenses to be
accrued in the corresponding accounting period.

Capitalisation of Interest Expenses and Foreign Exchange Losses

Turkish tax law allows capitalisation of interest expenses and foreign exchange losses on fixed assets
and inventories, even after the related asset or inventory is brought into use.
CMB regulations also allow such capitalisation, except in the case of fixed assets, where only
foreign exchange losses may be capitalised after the asset is in use.

Exchange losses incurred on the acquisition of fixed assets should be treated in a different manner.
The portion of the loss incurred up to the end of the financial period in which the fixed asset is
acquired, should directly be added to the cost of the asset. If the foreign exchange loss is incurred after the end of the period, it may be recorded either as a cost of the asset or an expense.

In case of stocks, the foreign exchange losses should be recorded as a cost in the profit and loss
account and not included in the value of stock.

Fixed Assets

Revaluation of fixed assets is permitted in Turkey.

  • Property, plant and equipment held throughout the year and the related accumulated
    depreciation may be revalued in accordance with the regulations of the Ministry of Finance of
    Turkey. The Ministry sets a rate, specified each year, which is in line, but not equal to the official
    inflation rate.
  • The surplus is credited to reserves.

Leasehold improvements are amortized over the lease term. If it is an indefinite lease, only straight
line depreciation over 5 years is applicable. Buildings even if revalued are depreciated on the basis of
original cost.

Fixed Asset Depreciation

Minimum rates of depreciation for fixed assets are set by the Ministry of Finance. The maximum
rate is currently 20% straight line or the equivalent double declining method. Assets may not be written
off in less than five years.

  • Buildings are depreciated at rates between 2% and 6% per year. Other tangible and
    intangible assets, except land, are depreciated principally over a minimum of five years using either
    the straight line or double declining balance methods.
  • Companies, which incur losses, are not required to expense depreciation. However, they
    then lose their right to expense depreciation and the book value of some assets is never
    reduced to zero.
  • Company cars are depreciated in 5 years. In the initial year, depreciation expenses
    should be calculated pro-rata i.e. calculated over the remaining months of the accounting year in
    which the cars are purchased. Half of the depreciation charges for cars is not tax-deductible.


Long-term investments are stated at cost plus reserves distributed by way of bonus shares at
nominal value. No consolidation or equity accounting is performed for equity participations.
Marketable Securities

CMB regulations require marketable securities to be valued at the lower of cost or net realisable
value. Turkish tax law does not allow recognition of such provision until a loss is realised on sale.


Under Turkish tax law doubtful debts may only be written off after they have been referred to the
law courts. In the event that the debt later becomes collectable, it is recorded as income. CMB
regulations require that a provision be established for doubtful receivables.


Stocks are almost always valued at cost. However, with effect from 1 January 1996, the LIFO
method of stock valuation will be allowed. Once implemented this method should be used for at least
five years and costs such as interest and exchange losses incurred on external funding becoming partly
disallowable for tax. Manufacturers are not subject to this tax restriction on the costs of external
borrowing if they are registered as manufacturers in the Industrial Registry. In practice, stock provisions
and, in particular, provisions to reduce stocks to net realisable value, are not usually made since
Turkey is an inflationary country.

Notes Receivable/Payable

CMB regulations require discounting of all notes receivable and post-dated cheques held at the
balance sheet date using the rate specified on the note, or if not specified the official rate. Under Turkish
Tax law, discounting of notes is optional but, if used, both notes payable and receivable should be

Accrued liabilities

Liabilities are to be recorded when the goods or services have been received although in practice,
liabilities for goods and services are not usually accrued until the related invoice has been received.

Dividends and taxes are not recorded until declared or calculated and paid. That normally takes
place during the annual general meeting, usually held in March.

Other liabilities

Severance and pay notice are not normally recorded in tax accounts until paid.

  • In accordance with existing labour law in Turkey, the company is required to make lump
    sum payments to employees whose employment is terminated due to retirement or for reasons
    other than resignation or misconduct. However, the lump sum payments cannot be expensed
    until paid.
  • In accordance with generally accepted accounting principles, CMB regulations require that
    a provision be made for the estimated maximum liability for such payments.


The surplus arising on the revaluation of fixed assets is available for distribution by way of bonus
shares when the revaluation fund is added to capital. The receipt of bonus shares from an investment is
reflected in the accounts of the investor as an increase to the investment cost and an increase to
revaluation surplus in reserves. Retained earnings are also distributable.

Revaluation of legal reserves is disallowed. Pursuant to Article 466 of the Commercial Code, 5%
of Net Income (up to 20% of total capital) has to be reserved prior to any dividend distribution (the
first legal reserve). A second legal reserve is then established of 10% of dividend distributed after tax
and first legal reserve.