Confusion in accounting and bookkeeping standards after the new Turkish Commercial Code
July 2014 | EXPERT BRIEFING | FINANCE & ACCOUNTING
After the launch of the new Turkish Commercial Code, independent auditing became mandatory for certain joint stock companies. Companies that, alone or together with their affiliated companies and subsidiaries, meet at least two of the following conditions are now subject to the independent auditing requirement: (i) companies with total assets equal to or higher than TL 75m; (ii) companies with annual net sales revenues equal to or higher than TL 150m; or (iii) companies with 250 or more employees.
Certain institutions, such as banks and financial institutions, which are already subject to the auditing standards of the Capital Markets Board, are now automatically subject to independent auditing. Companies under the jurisdiction of the Energy Market Regulatory Authority are subject to the independent auditing requirement only if they meet certain criteria set forth in the respective regulation. It is anticipated that approximately 3500 Turkish companies fall under the independent auditing requirement for 2014.
The new system brought certain ambiguities, however. There is now a fundamental question waiting to be answered: namely, which accounting system must a company use to prepare its year-end financial statement? The issue arises when a company is subject to independent auditing and at the same time must comply with the Turkish Accounting Standards, which is a transposition of the International Financial Reporting Standards (IFRS). While companies subject to independent auditing keep their company records and legal books and prepare their financial statements in accordance with principles set out in the Tax Procedure Law, they are also required to prepare their year-end financial statement in compliance with Turkish Accounting Standards.
There was no such controversy or confusion before the launch of the new accounting and bookkeeping standards and requirements, as all financial statements, except for those of public companies, were prepared in accordance with the Tax Procedural Law. However after 1 January 2013, companies became obligated to prepare two separate financial statements, one under the Turkish Accounting Standards and the other subject to the Tax Procedural Law, which inevitably caused certain accounting discrepancies. The two most common issues companies struggle with in practice involve which financial statements must be taken into account while calculating the distribution of profits and the determination of whether the company is under technical bankruptcy.
The question as to whether the net profit of joint stock companies subject to independent auditing should be calculated based on the financial statements prepared in accordance with Turkish Accounting Standards or the Tax Procedural Law is controversial, as there is no clear provision on this issue in the legislation. The more supported view is that the net profit of the company subject to independent auditing should be calculated according to the annual balance sheet prepared based on Turkish Accounting Standards, in order to comply with the requirements of the Turkish Commercial Code. However, there are those who argue to the contrary and believe that the net profits of the company should be calculated based on the Tax Procedural Law.
This ambiguity has already been resolved for public companies since they are also required to prepare IFRS financial statements in addition to tax law based financial statements under capital market legislation. Accordingly, the lower of the profit calculated as per the Capital Market Board and Tax Procedural Law based financial statements will be taken into account while calculating the distributable profit. A similar approach may be followed by non-public-companies, although there is no such explicit regulation for non-public companies.
The issue of whether or not a company is in technical bankruptcy is also unclear in terms of which financial statements should be taken into account. Technical bankruptcy is defined as the loss of two-thirds of a company’s capital. In such cases, boards of directors must immediately notify their shareholders and convene a general assembly meeting either to: (i) decrease the capital amount and continue to run the company with the existing shareholders’ equity; or (ii) replenish the capital to its pre-loss amount to remedy the technical bankruptcy situation. The evaluation as to whether the company is under technical bankruptcy or not should be conducted as per the last annual balance sheet of the company. In such case, it is important to determine which accounting standards will be taken as the basis in calculating the equity/capital and legal reserves ratio as per the annual balance sheet of the company. Accordingly, if the company is subject to independent auditing and thus to Turkish Accounting Standards requirements, it is not clear whether the financial statements prepared in accordance with Turkish Accounting Standards or the Tax Procedural Law will become applicable. The more supported view is that the calculations should be made according to the annual balance sheet prepared based on Turkish Accounting Standards in order to comply with the requirements of Turkish Commercial Code. It seems that Turkish companies will continue to struggle with this ambiguity until the issue is clarified by secondary legislation and the market practice is settled with relevant court precedents.
Naz Bandik Hatipoğlu is a senior associate at Çakmak Avukatlık Bürosu. She can be contacted on +903124424680 or by e-mail: firstname.lastname@example.org.
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Naz Bandik Hatipoğlu
Çakmak Avukatlık Bürosu