James Lockwood, partner, Norton Rose Fulbright

Ergin Mizrahi, senior partner, Pekin Bayar Mizrahi in alliance with Norton Rose Fulbright in Turkey

Fatoş Otcuoğlu, partner, Pekin Bayar Mizrahi in alliance with Norton Rose Fulbright in Turkey

Fikret Sebilcioğlu, managing partner, Cerebra CPAs and Advisors

Watch the full webinar, "Implications of inflationary environment in Turkey in the context of law and accounting."

As inflation creates uncertainty globally, corporate decision makers are working on plans to mitigate its consequences. The best companies elevate the role of accounting, finance and legal functions, improve the customer experience, develop more sophisticated pricing models, and build resilient operations. In a webinar Norton Rose Fulbright organized jointly by its alliance firm Pekin Bayar Mizrahi, the British Chamber of Commerce and the Cerebra CPAs & Advisors in Turkey, the effects of inflation in Turkey and the UK and the critical measures companies should consider to minimize its adverse consequences were discussed from the perspectives of accounting and law.

Ergin Mizrahianalyzed the high inflation problem from the perspectives of how to handle current and future contracts and the problem of discrepancy between default interest rate and the inflation rate. In terms of the existing contracts, he mentioned that parties involved in a contract may ask for the court's intervention for a revision due to the changes occurring in the monetary environment, this being accepted in international law under principles such as UNIDROIT and CISG and is part of Turkish codified law since 2012 as a statutory element which defines hardships that occur after the signing of the contract. However, Ergin also shared opposing examples of Turkish case-law in which inflation was and was not considered to be a hardship which required a contract revision. Varying court decisions being underlined, he emphasized that for future contracts, clauses may be included which define conditions such as price adjustments if the inflation rate reaches a certain threshold. On a final note, Ergin also drew attention to a potential threat of economic loss for the creditors, stemming from the current gap between the standard default interest rate and the inflation rate in Turkey, in cases in which the debtor's payment is overdue.

Fatoş Otcuoğlutalked about how contractors are being affected by the Decree No: 32 which enforces the usage of the Turkish Lira in most local contracts since 2018. The decree issued then with the purpose of protecting the Lira from further devaluation may be a source of potential difficulties in today's hyper inflation environment. Fatoş concluded by suggesting that an adaptation item may be added to the contracts for a special price adjustment method to overcome potential economic losses arising from application of Decree No: 32.

James Lockwood, provided an English law perspective on the inflationary environment considering how companies might look to mitigate the consequences of high inflation. This was by way of contrast with Turkey and because contracts in Turkey often include English governing law clauses. James talked about how the impact of inflation on commercial contracts is principally a pricing question. He explained how, absent price adjustment or inflation indexation clauses, English law holds parties tightly to their bargains and arguing for force majeure, or that there should be an implied term that prices should rise in line with inflation, is unlikely to provide a basis to escape a contract. James considered how commercial parties might protect themselves against high inflation in new contracts and/or if they are amending existing ones.

Fikret Sebilcioğlu, talked about the accounting perspective of the indicators of an inflationary economy and how companies can mitigate its effects to minimize the risks in the current economic environment in Turkey. Fikret gave detailed information about the mechanics of inflation accounting in terms of investments, inventory policy, production policy, sales policy and salary policy of companies. He touched upon the inflation accounting overview in accordance with International Accounting Standard 29 Financial Reporting in Hyperinflationary Economies (IAS 29) and emphasized that in hyper inflation environments, for financial reportings to be meaningful from year to year, figures must be adjusted according to price indices.