What is inflation accounting?

In periods of high inflation, balance sheets do not show their real values. Inflation adds artificial value to companies. Inflation accounting can be interpreted as a set of accounting operations applied to bring balance sheets to their real values.

There are 2 types of asset classes and they are affected differently by inflation.

Non-monetary assets: Their nominal values ​​are volatile in the inflation environment. Their purchasing power remains relatively unchanged. (Tangible fixed assets and inventories are examples.)

Monetary assets: While maintaining their nominal values ​​in an inflationary environment, their purchasing power changes relatively. (Bonds, Banks, Receivables)

Let's exemplify:

An example inflation accounting calculation with a study on the method:

To explain simply;

If the firm's standard EBITDA margin is 25%, the situation would be as follows (excluding funding cost). In other words, while there was a 77% return on equity in an inflationary environment, it would have been 26% without it. In this case, while the return on equity with inflation is 77%, the profit is adversely affected since the return on equity without inflation is 26%.

We don't adjust for inflation as the cost of sales is already an expense, and we set the pricing for sales using the firm's standard EBITDA margin. Instead of increasing the price increase of the company exactly with the inflation rate, we found it more accurate and compatible with practice to increase the company's costs by taking into account the multiple factors. That's why we used the standard EBITDA margin to calculate it. When we take the difference between the 0% inflation environment and the inflationary environment, it becomes clear how the profit and income of the company are affected by inflation in real terms.

As we can see in this table, we see that our company is making a profit in the current situation, but when we adjust the balance sheet from inflation, the company does not make a net profit at the same level. This may require up or down revisions in share prices, as we anticipate that market multipliers such as P/E, PD/DD will change their calculated values.

Conclusion. We would like to start by reminding that the details of inflation accounting are not clear. It has been announced by the regulators that inflation accounting will not be subject to any adjustments until 4Q23. If inflation accounting is introduced, banks can be expected to perform relatively negatively because money has a time cost and the fact that inflation - deposit interest rates are in such a high range can force banks. But we do know that banking companies hold large amounts of CPI-based bonds, which could dampen the damage. For food retailers, this is likely to be a positive catalyst.

Kaynak:Tera Yatırım-Enver Erkan
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