LEGAL BOOKS & GENERAL ACCOUNTING PRINCIPLES

1 Legal Books and Records

Corporations including non-resident corporations having branches in Turkey are required to keep legal books based on the Uniform Chart of Accounts, which requires the use of accounting codes assigned for each account. The legal books must be taken as a base for the issuance of financial statements.

The Tax Procedural Law requires the maintenance of the following legal books, which must be authenticated by a public notary before the commencement of the accounting year.

. Journal ledger

 

. General ledger

 

. Inventory ledger

The legal books and the accounting records must be kept in Turkish and in Turkish currency terms. Computerised or dual language records are allowed provided that the requirements of the Uniform Chart of Accounts and the Tax Procedural Law are complied with.

Companies fulfilling certain conditions (i.e. the company must have a minimum paid-up capital equivalent of US$100 million and at least 40% of its shares must be held by onresidents) may be allowed by the Council of Ministers to maintain their legal books in the functional foreign currency terms, instead of Turkish currency.

Effective from 01.01.2005, the legal currency unit of Turkey is YTL (New Turkish Lira) and YKr (New Kurus).

The statute of limitations imposed by the tax legislation and the Turkish Commercial Code is five years and 10 years, respectively. Accordingly, the legal books must be retained for at least five years for tax purposes.

2 Recognition of Income and Expense - Accruals

Accrual basis accounting is generally applicable for corporate income tax purposes. In principle, liabilities are to be recorded when the invoices pertaining to goods or services are received. However, an exception to the general rule exists for service charges at the year-end, the amounts of which are known in advance (electricity, water bills etc.).

Capital Markets Board regulations, applicable for public companies, also require all revenues and expenses to be accrued in the related accounting period.

3 Foreign Currency Transactions

The Turkish Tax Procedural Law requires maintenance of legal books in Turkish lira terms. Accordingly, all foreign currency transactions are translated into local currency at the prevailing foreign exchange rate at the transaction date (i.e. invoice date). Assets and liabilities denominated in foreign currency are re-valued at the year-end based on the exchange rates announced by the Ministry of Finance. Foreign exchange gains or losses emanating from the valuation are posted to the related accounts and they are, in principle, taken into account in determination of the tax base.

4 Bad Debts

Under the Turkish Tax Procedural Law, receivables shall be treated only as bad debts, and provisions shall be made for such if the receivables have been taken to the court or if legal proceedings have been commenced.

In the existence of one of the two conditions stated above, provisions set aside for such receivables can be legally expensed. However, such receivables must still be shown on the balance sheet as “doubtful receivables”. The amount of provisions shall not be higher than the actual receivables. In case of receivables with a guarantee, the provision will not include the guaranteed amount.

In case receivables are collected after setting aside provisions, then the amount collected will be recorded as income. If as a result of the court action or legal proceedings, it is decided that such receivables shall not be collected, then the provision account is closed and the related receivables are written off.

5 Bad Debts Written Off

Receivables that shall not be collected based on a court ruling, or on a convincing document/certificate verifying that the receivables are not collectible, shall be recorded as an expense at their book value.

6 Inventory Valuation

The inventories are valued at their cost value, however they are adjusted against the effects of inflation using the Wholesale Price Indices if the inflation adjustment conditions are realised. Under the regulations of the Tax Procedural Law, for goods produced the cost value includes direct and indirect production costs. It is optional to allocate general administration expenses into the cost of goods produced.

The inventory may be valued by using the following valuation methods:

. Actual or moving weighted average

. FIFO

7 Inflation Accounting

Inflation accounting system has been introduced in Turkey as at the beginning of the year 2004. In the event of the cumulative inflation exceeding 100% in the last three years and if the annual inflation at the end of the current tax period exceeds 10%, the inflation adjustment would be made. The inflation adjustment is not applicable if both of these conditions are not realised simultaneously. Inflation Accounting can be defined to recalculate the financial amounts of the non-monetary items by multiplying them with the adjustment rate in order to show their real values at the time when the financial statements are structured.

In the fiscal year 2005, the Ministry of Finance announced with a circular that inflationary accounting in effect as of 2004 would not be applied for the first quarter of the fiscal year 2005 since the conditions for inflation adjustment applications had not been realised.

Inflation adjustment rules have not been applied since then due to the same reasons.

8 Loss Carryovers

Losses can be carried forward for up to five years, but they cannot be carried back.