Erdem & Erdem Law Firm: Innovations In The New Turkish Commercial Code Concerning Financial Statements And Reserve Funds

In General

Financial statements are formalized presentations of the financial status and performance of a company. Financial statements of general purpose aim to provide information about the financial status, performance and cash flows of a company in order to facilitate the adoption of financial decisions. Additionally, financial statements show the efficiency of resources entrusted to directors.

Financial statements include balance sheet information about assets, liabilities, foreign resources, and ownership equity of the company; income statements expenses, profit and loss; statement of modifications in equity; and statement of cash flow.

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 regulated in the TAS and its appendix, and the annual activity report of the BoD 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

Article 515 of the New TCC regulates the true and fair view principle. This principle which has Anglo-Saxon origins has been included in the New TCC.

True and fair view principle regulates that the financial statements shall be true, accurate and fair, and shall reflect the financial status of the company in accordance with the facts. This article regulates that the financial statements shall be prepared pursuant to TAS. Financial statements shall be complete, comprehensible, comparable to previous years, compatible with company's needs, 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 annual activity report. 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, fairly and in accordance with the actual status. In the justification of Article 516, it is stated that a true view shall be provided in accordance with Article 515 of the New TCC, and reference is made to 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, pecuniary benefits of BoD members and executive officers such as remuneration and premiums, 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 subject to 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 which regulate general statutory reserve funds is in parallel with 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 on recovering losses, maintaining the company or preventing unemployment, unless it exceeds half of the 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 some funds that cover 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 their acquisition value if 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 reevaluated 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 extracted from Article 468 of the TCC, it also brings some additional regulations. 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.

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 that employees and workers could not benefit from the reserve funds at the end of the employment relationship, the amounts paid by employees shall be refunded with legal interest accrued starting from the date of payment. The New TCC has adopted the option of legal interest instead of interest fixed to 5% by 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 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, 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 articles of association, and the shareholders may only request the annulment of the resolution of the GA.

Miscellaneous Provisions

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

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

Pursuant to Article 527, which regulates confidentiality obligation, those who examine commercial books and documents of joint stock companies are under confidentiality and privacy obligation. In case of failure to comply with this obligation, material and moral damages of the company shall be compensated. The second paragraph of this article reserves the articles of criminal legislation pertaining to denunciation of crimes.

Conclusion

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 adopted. 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.