FX-Protected Deposit Accounts under TFRS/IFRS and BOBİ FRS

What is an FX-protected deposit?

The amendments made by Communiqué No. 2022/1 "Amending the Communiqué on Supporting Conversion to Turkish Lira Deposit and Participation Accounts" and Communiqué No. 2022/2 "Amending the Communiqué on Supporting Conversion from Gold Accounts to Turkish Lira Deposit and Participation Accounts", which entered into force upon publication in the Official Gazette of 1 January 2022, allow resident legal entities holding foreign currency deposit or foreign currency participation fund balances and gold accounts as of 31 December 2021, and those opening gold accounts against processed and scrap gold after that date, to request the conversion of those accounts into TRY, and set out the related procedures. The Communiqués define resident legal entities as legal entities with their legal domicile in Türkiye, excluding banks and other financial institutions determined by the Central Bank. In an FX-protected TRY deposit account, if the interest return at maturity is lower than the rate of increase in the exchange rate, the increase in the exchange rate is credited to the account.

Announcement by the Public Oversight Authority (KGK) on "Accounting for FX-protected deposit accounts"

On 1 March 2022, KGK published an announcement on "Accounting for FX-protected deposit accounts". According to the announcement:

• Measurement of FX-protected TRY deposit and participation accounts in TFRS/IFRS financial statements (converted from foreign currency)

Under TFRS 9, one of the conditions for classifying financial assets as measured at amortised cost (AC) or at fair value through other comprehensive income (FVOCI) is that the contractual cash flows give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding (SPPI test). Foreign currency deposit and participation accounts converted into Turkish lira by the end of 2022 will, after conversion, also give rise to exchange difference payments by the CBRT in addition to interest payments on the principal outstanding, so they will need to be classified as at fair value through profit or loss (FVPL).

The announcement also states that these accounts will be presented under "Financial investments" in the Statement of Financial Position (balance sheet), and that changes in their fair value at the end of reporting periods will be recognised in the line item "Income/Expenses from Investing Activities" in the Statement of Profit or Loss and Other Comprehensive Income.

• Measurement of gold accounts converted into TRY deposit and participation accounts in TFRS/IFRS financial statements (converted from gold)

The balances of gold accounts in entities' balance sheets as of 31/12/2021, and of gold accounts opened after that date against processed and scrap gold, will need to be classified as at fair value through profit or loss, because their contractual cash flows do not consist solely of payments of principal and interest but provide a return indexed to the value of a commodity. If these accounts are converted into Turkish lira under the legislation by the end of 2022 and placed in Turkish lira deposit and participation accounts with a maturity of at least three months, they will again need to be classified as at fair value through profit or loss, because they will then earn a return from support payments by the CBRT in addition to interest payments on the principal outstanding.

• Valuation

In TFRS/IFRS financial statements, the FX-protected deposit account is regarded as a hybrid contract containing a derivative element. Where the host contract in a hybrid contract is a financial asset, the embedded derivatives are not separated from the hybrid contract. Because of its structure, the FX-protected deposit account can be assessed in a similar way to an option among derivative products.

• Measurement of FX-protected TRY deposit and participation accounts in BOBİ FRS financial statements

KGK's announcement also clarifies the treatment for entities applying BOBİ FRS. Under BOBİ FRS, FX-protected deposit accounts will be presented under "other financial instruments" and measured "at fair value through profit or loss". Accordingly, they will be presented under "Financial Investments" in the Statement of Financial Position, and changes in their fair value at the end of reporting periods will be recognised in the line item "Gains on Increases in the Value of Financial Investments or Losses on Decreases in the Value of Financial Investments" in the Statement of Profit or Loss.