Turkiye: Insurers’ adoption of inflation accounting expected to be smooth

Insurance companies in Turkiye will not face huge difficulties in adopting inflation accounting, according to EY Turkiye tax partner and leader of financial services Levent Atakan.

Speaking in a video on the YouTube channel of Sigortaci Gazette, Mr Atakan said that high inflation affects financial statements, and erodes especially the capital of companies. “Reflecting this in the financial statements and showing the real situation of the companies is important to investors and those who plan to invest,” he said.

“The first inflation accounting application in Turkiye was implemented in 2003. It continued for one more year in 2004 and then ended after inflation declined. We are experiencing a return to the past situation right now.”

He added that at present, all taxpayers including insurance companies and agencies adopt inflation accounting in taxation matters in Turkiye. They will continue to do so in 2024 and 2025.

In insurance, the Insurance and Private Pension Regulation and Supervision Agency (SEDDK) has directed that companies in the sector start to adopt inflation accounting on 1 January 2025.

Mr Atakan said that inflation accounting is different for tax purposes and for accounting based on international financial reporting standards. He said that one difference is that the inflation index used in inflation accounting for tax matters is the producer index, while that used in financial reporting is the consumer index. There are also points where the two approaches deviate from each other. “Even though we are essentially talking about the same thing, it does not correspond to the same results mathematically,” he said.

Nevertheless, Mr Atakan said that he does not think that insurers will have great difficulty complying with the SEDDK’s directive. He said, “The main reason for this is that insurance companies have sound knowledge of finance and the calibre of their staff is high. Most inflation accounting standards have already been implemented in international companies. There are also independent auditing organisations and consultants in the sector. I don’t think there will be a big problem. Even though it will bring an additional workload, it is one of the regulations that are long overdue because people who invest want to see the real impact on financial statements.”

Turkey’s annual inflation rate climbed to 68.5% in March 2024 from 67.07% in February, the Turkish Statistical Institute said. In January, the annual consumer price inflation was 64.86%. During 2023, inflation ranged from 38% to 65%.