Turkey: Innovations In The New Turkish Commercial Code Concerning Financial Statements And Reserve Funds

Financial statements are among the matters subject to major amendments with the New Turkish Commercial Code numbered 6102 ("New TCC"). The New TCC has adopted the Turkish Accounting Standards ("TAS") which are compatible with International Financial Reporting Standards ("IFRS"), which were not regulated under the Turkish Commercial Code numbered 6762 ("TCC"). Consequently, the financial statements will be prepared in conformity with the financial standards adopted by industrialized countries and uniform in practice will be achieved. Additionally, competition in international markets is aimed at and Turkish markets will be more globalized. As per reserve funds, basic principles in the TCC have been maintained with the New TCC.

In General

Financial statements are defined as presentations of the financial status and performance of an enterprise. Financial statements of general purpose aim to provide information about the financial status, performance and cash flows of an enterprise in order to facilitate the adoption of financial decisions of large masses. Additionally, financial statements show the efficiency of usage of resources entrusted to directors.

Financial statements include information about assets, foreign resources, equity, profit and loss; modifications in equity and statement of cash flow of the enterprise.

Pursuant to Article 514 of the New TCC, the financial statements and annual activity report of the company shall be prepared by the Board of Directors ("BoD"). The BoD shall prepare the financial statements and its appendices as well as the annual activity report regulated under the TAS with regards to the previous accounting period within the first three months of the accounting period following the balance sheet date, and present to the General Assembly ("GA"). With the said article, the financial statements would be presented to the GA within a certain time period

True and Fair View Principle

Article 515 of the New TCC regulates the true and fair view principle. This principle with Anglo-Saxon origins has been included in the New TCC as "honest reflection".

The true and fair view principle envisages that the financial statements shall reflect the financial status of the company in a true, accurate and fair manner and in accordance with the facts. This article regulates that the financial statements shall be prepared in compliance with TAS. Financial statements shall be complete, comprehensible, comparable to previous years, compatible with needs of the enterprise, transparent and trustworthy. Therefore, the conditions of the company shall be reflected clearly and in a comprehensible manner. It is possible to say that the financial statements take a picture of the financial status of the company.

Annual Activity Report of the BoD

Article 516 of the New TCC regulates the annual activity report. The annual activity report presents the activities of the company for the relevant year and its financial status in all aspects. In the activity report, the activities of the company and financial status shall be reflected accurately, completely, directly, fairly and in accordance with the actual status. The justification of Article 516 also states that the annual activity report shall provide a true view in accordance with Article 515 of the New TCC, and reference is made to the true and fair view principle.

In the annual activity report, the financial status of the company shall be evaluated in accordance with financial statements. The BoD shall also state in the report the details about the company's development and the risks that might be encountered.

Article 516/2 of the New TCC regulates the key elements that should be included in the annual activity report. Pursuant to the said article; significant events that took place after the end of the activity year, research and development activities of the company, pecuniary benefits of BoD members and executive managers such as remuneration and premiums, various expenditures, real and pecuniary opportunities, insurance and similar securities shall be detailed in the annual activity report.

Pursuant to Article 516/3 of the New TCC, the mandatory content of the annual activity report shall be regulated by a regulation of the ministry of Industry and Commerce.

Articles 517 and 518 of the New TCC bring similar dispositions with regards to financial statements and annual activity report of group of companies. Pursuant to article 517 of the New TCC, TAS shall determine the enterprises obliged to prepare consolidated financial statements and enterprises which fall within the scope of consolidation, and relevant issues. Article 518 of the New TCC regulates that the annual activity report with regards to group of companies shall be prepared with the BoD of the parent company, pursuant to Article 516 which regulates the annual activity report.

Reserve Funds

Articles 519-523 of the New TCC regulate reserve funds. Article 519 of the New TCC which regulates the general statutory reserve funds is similar to the corresponding disposition of the TCC. Pursuant to Article 519/1 of the New TCC, five percent of the annual profit shall be reserved as general reserve fund until this sum reaches twenty percent of paid-in capital. After reaching this threshold, figures listed under Article 519/2 shall be added to general statutory reserve funds. General statutory reserve funds shall be spent only on recovering losses, maintaining the activities of the enterprise or preventing unemployment, unless it exceeds half of the share capital or the issued capital.

Article 520 of the New TCC provides a new disposition which was not included in the TCC. Pursuant to Article 520/1 of the New TCC, the company shall reserve funds equivalent to the amount of the shares acquired by the company, in the event that the company acquires its own shares. These reserve funds may only be spent in proportion with the acquisition value of the bought back shares once transferred or extinguished. Article 520/2 of the New TCC regulates that revaluation funds and other funds included in the liabilities of the company may be spend when converted into capital and when the assets re-evaluated are amortized or transferred.

Reserve Funds on the Discretion of the Company

Article 521 of the New TCC is entitled as "reserve funds on the discretion of the company". This title has replaced the term "optional reserve funds" regulated by Article 467 of the TCC. Pursuant to this article, the articles of association may regulate that more than five percent of the profit may be reserved as reserve funds, and that reserve funds may exceed twenty percent of the paid-in capital. Additionally, the articles of association may provide other reserve funds and determine their allocation and in which conditions they may be spent. This article is similar to Article 467 of the TCC.

Article 522 of the New TCC regulates the reserve funds in favor of employees and workers. While this article has been regulated mainly through adapting Article 468 of the TCC, it also brings some additional dispositions. Pursuant to the said article, funds may be reserved in order to found and maintain charitable organizations in favor of directors, employees and workers of the company, or in order to be given to public legal entities which have similar purposes. Directors of the company were not regulated within the scope of this article in the TCC, unlike the relevant provision of the New TCC.

Article 522/2 of the New TCC regulates that cooperatives may be founded besides foundations by separating the funds reserved for charitable purposes and other assets. The third paragraph of the said article regulates that, in case fees have been collected by the company for this purpose, and the employees and the workers could not benefit from the relevant reserve funds at the end of the employment relationship, the fees paid by employees shall be refunded to them with legal interest accrued starting from the date of payment. The New TCC foresaw the application of statutory interest instead of interest fixed to 5% under the TCC.

Relation between Profit Share and Reserve Funds

Article 523 of the New TCC has adopted limitations with regards to reserving funds other than specified by legal provisions and articles of association. Pursuant to the second paragraph of the said article, the GA may resolve on reserving funds other than specified by legal provisions and articles of association if necessary for providing assets and if it may be deemed suitable with regards to permanent development and stable profit distribution, taking into account the benefits of all shareholders. While this article aims to protect shareholders with regards to profit share, certain problems encountered with the TCC could not be eliminated. It is in the discretion of the GA to reserve funds other than those specified by legal provisions or the articles of association, and the only right the shareholders have against the GA resolution is requesting its annulment.

Miscellaneous Provisions

Article 524 of the New TCC regulates a new provision with regards to the publication of financial statements. Pursuant to this article, the financial statements of the company and the group of companies and the annual activity report, the GA resolution pertaining to profit distribution and the GA resolution with regards to decision of the auditor shall be published in the Trade Registry Gazette and in the website of the company within six months following balance sheet date. In case of failure to comply with this obligation, penal sanctions regulated under the Article 562/6 of the New TCC shall be applicable.

Article 526 of the New TCC regulates summary financial statements. Pursuant to this article, small scaled joint stock companies and Turkish branches of companies with a head office abroad may publish summary financial statements.

Pursuant to Article 527, which regulates the confidentiality obligation, those who examine commercial ledgers and documents of a joint stock company are under the obligation of confidentiality and privacy. Persons failing to comply with this obligation shall compensate the material and moral damages of the company. The second paragraph of this article reserves the articles of criminal legislation pertaining to denunciation of crimes.


The innovations brought by the New TCC with regards to financial statements aim to adopt the standards applied in industrialized countries. The New TCC provides that the financial statements of the company shall be prepared in accordance with the TAS which is compatible with IFRS. The true and fair view principle has been included in the New TCC and the financial statements of the company shall reflect the current financial status of the company. With respect to reserve funds, the basic principles of the TCC have been maintained. With these amendments, the financial status of the company shall be reflected in accordance with the current financial status and Turkish markets would be harmonized with foreign markets.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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