Economic Interpretation of the Distorting Effects of High Inflation on Financial Reporting and the Case of Türkiye

Abstract This study examines the effects of high inflation on financial reporting through a framework linking accounting measurement to economic decisions. It uses a purposive narrative review of Turkish and English literature, IAS 29, and Turkish Accounting Standard TMS 29, together with theoretical analysis. The framework distinguishes three sources of distortion: the aggregation of amounts expressed in purchasing power from different dates, divergence between the general price level and firm-specific prices, and incomplete interpretation of the wealth effects of monetary exposure. These distinctions imply that nominal profit growth cannot be equated with improved real performance and that inflation adjustments need not affect all firms in the same direction. The study contributes conditional propositions connecting measurement problems to dividend distribution, investment, credit assessment, and capital allocation. A hypothetical numerical illustration demonstrates that maintaining general purchasing power and maintaining physical productive capacity can yield different assessments of distributable surplus. Inflation accounting supports comparability but cannot fully eliminate relative-price changes, liquidity risk, or uncertainty about future cash flows. Accordingly, financial statements in high-inflation environments should be interpreted jointly with monetary exposure, asset age, the working-capital cycle, and the concept of capital maintenance. The propositions are theoretical expectations for future empirical testing rather than estimated causal effects. Keywords: high inflation, financial reporting, inflation accounting, monetary exposure, capital maintenance