The revaluation of business assets in detail

The original value at which business assets were entered in the balance sheet may turn out to be inadequate if that value does not coincide with the actual value. If, in fact, the value of the asset entered in the balance sheet is underestimated, a business asset revaluation should be carried out.

The revaluation of business assets consists of an adjustment of the value, during the preparation of the annual financial statements, of the assets contributed at a time prior to their real value.

In this article, we will take a closer look at this topic. You will be provided with details on the revaluation of business assets, such as: which professional entities may implement it? Which assets can be revalued? What are the deadlines for the revaluation of business assets?

Let's get to the heart of the matter.

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What is the revaluation of business assets?

The revaluation of business assets consists of increasing the value of assets that, during the preparation of the balance sheet and profit and loss account, were recorded at a value lower than their actual value.

The revaluation of business assets consists of a derogation from the ordinary valuation criteria of fixed assets defined by the national accounting standards OIC. In fact, it permits the recording of values in the balance sheet that are higher than those provided for by the accounting regulations.

→ A revaluation of business assets may be performed by the following entities:

• Capital companies;
• Partnerships;
• Individual entrepreneurs;
• Non-commercial entities

provided these entities do not adopt International Accounting Standards in preparing their financial statements.

→ Revaluations of business assets may be:

• Mandatory (or economic);
• Optional (or monetary).

Mandatory and Optional Revaluations of Business Assets

Mandatory

The Civil Code defines two types of compulsory business asset revaluations, also called financial revaluations:

1. Revaluations concerning tangible fixed assets that were previously written down, provided that, in subsequent years, the causes for the adjustment of the value of said fixed assets have ceased to exist;
2. Revaluations undertaken in the event of extraordinary events that cause an increase in the value of the asset (e.g., coinciding with the discovery of an oil field on land).

Mandatory revaluations are aimed at restoring the original value of the asset because the causes of the value adjustment have ceased to exist.

Optional

Monetary revaluations, or optional revaluations, concern elements of the assets that have an inadequate value due to the effect of inflation.

In fact, the loss of the purchase value of money distances the historical value of assets from their actual value. This is why voluntary revaluations are based on certain legislative measures that intervene to regulate them according to fluctuations in inflation.

What Monetary Revaluations of Business Assets Involve

Through the monetary revaluation of business assets, the following purposes can be achieved:

• Obtain more meaningful balance sheets. In fact, elements of assets such as receivables, capital goods, merchandise, etc. are measured homogeneously;
• To calculate the most appropriate depreciation rates, since these can be related to the new values. The depreciation quotas will thus be able to reflect the actual depreciation of the assets taken into account.
• Through depreciation allowances, compulsory revaluations have an indirect influence on the determination of the economic result for the year.
• Calculate the actual value of capital losses and gains. These are compared to new values if there are disposals of revalued assets.
• Avoid paying taxes on apparent and, therefore, not actual profits.
• Obtain a more truthful ratio between equity and debt.

The Substitute Tax for the Revaluation of Company Assets

In order to carry out a revaluation of business assets, a substitute tax must be paid equal to 3% of the difference between the new revalued value attributed to them and the old cost of recording the assets in the balance sheet. That is, the tax must be applied on the value obtained by the following subtraction operation:

Revalued value of the same asset - Historical cost of the asset

The 3% substitute tax applies to all assets, both tangible and intangible. to be paid in three annual instalments.

👀 There is also the possibility of performing the revaluation by paying a substitute tax at 10%. In this case, the company may act without being burdened with the payment of further taxes.

Who can revalue business assets?

The revaluation of business assets is operable by the following business entities, regardless of the tax regime adopted (whether ordinary or simplified):

• Companies and/or commercial entities resident in the territory that do not adopt IAS/IFRS for the preparation of their financial statements;
• Sole proprietorships;
• Commercial partnerships;
• Non-commercial entities;
• Non-resident persons with a permanent establishment in the territory.

What assets may be revalued?

All assets can be subject to revaluation except those where the business activity is directed to trade and production. Even shareholdings are not limited, if they are recorded as financial fixed assets.

The revaluation may also concern individual assets, i.e. it need not necessarily be performed on a homogeneous class or category of assets. This novelty was introduced by Article 110(2) of Decree-Law 104/2020.

👂 According to what was clarified by Circular No. 2 of 7/2/2013, assets that have already been revalued previously are also subject to revaluation, but only if they have an economic value that has not yet been fully exploited. This is the case of partial revaluations, further increases in value of the asset, etc.

Thus, under current legal provisions, they may be revalued:

• Tangible and/or intangible assets (e.g. patents, licences, trade marks, etc., with the exception of mere deferred costs). On the other hand, tangible and/or intangible assets to the production or exchange of which the business activity is directed are excluded;
• Equity investments in subsidiaries and associated companies, but only if they constitute financial fixed assets.

☝ Accounting Standard OIC 16 states that the revaluation of a tangible fixed asset cannot in itself lead to an extension of the remaining useful life of an asset.

However, an adjustment of the useful life is possible, if this is the result of a valuation performed independently and not as an automatic consequence of the revaluation act.

Special cases of revaluation of business assets

The following categories are exceptions, i.e. special cases of revaluation of business assets:

• Assets redeemed from leases are excluded from revaluation. These are assets redeemed in the period between the balance sheet closing date and the revaluation balance sheet closing date. For example, assets redeemed during 2020 may not be revalued, as they are not recognised in the 2019 balance sheet;
• Fully depreciated assets may be revalued, if they appear in the balance sheet. They are only deemed to be owned if their historical cost and depreciation are shown in the notes to the financial statements.

  👉 For entities under the simplified accounting regime, there is an alternative to recording them in the notes to the financial statements, i.e. recording them in the register of depreciable assets.

• Assets receivedare subject to revaluation :

  • As a result of a contribution: it is possible to revalue assets acquired in 2020, provided that these have become the property of the entity by the end of the relevant financial year (31/12/2019).

    The rules determining the procedure are defined by the principle of continuity of the period of ownership between the transferor and transferee contained in Article 176(4) of the TUIR (Circular 18/2006).

  • Following mergers orincorporations of companies or demergers thereof: the reference date is the date of acquisition of the asset.

Information to be included in the notes to the accounts

The information to be included in the notes to the annual accounts in order to carry out a revaluation of business assets concerns:

→ The valuation criteria, as set forth in paragraph 1 of Article 2427 of the Civil Code.

→ The movements relating to fixed assets, pursuant to Article 2427, Paragraph 1, No. 2 of the Civil Code.

→ The nature and uses of equity items, pursuant to paragraph 1, no. 7-bis of Article 2427 of the Italian Civil Code.

→ Deferred taxation, in accordance with paragraph 1, no. 14 of Article 2427 of the Civil Code (in the case of revaluation purely for statutory purposes).

Instead, the information concerning the revaluation of business assets to be attributed in the Directors' Report is:

→ The appropriateness of the values used for revaluation of the asset(s), in accordance with Article 11, paragraph 3 of Law No. 342 of 2000.

→ The effect of the revaluation itself on performance indicators (e.g.: on profitability ratios, equity volume, structural margin, etc.), pursuant to paragraph 2 of Article 2428 of the Civil Code.

→ The criteria adopted to direct the revaluation of business assets, pursuant to paragraph 3 of Article 1 of Law No. 342 of 2000.

→ Certification that the revaluation does not exceed the limits provided for by law (see above article).

Attention! The cost price, including any revaluation carried out, must be reported in the inventory of the year in which the revaluation was carried out, pursuant to paragraph 4 of Article 11 of Law No. 342 of 2000.

Revaluation of Corporate Assets 2021

Changes introduced by the Budget Law 2021

Budget Law 2021 introduced amendments to Article 110 of Decree-Law No. 104 of 2020 through the addition of a new paragraph: paragraph 8-bis. Through the latter, the possibilities of applying the revaluation of business assets are extended to the following cases:

• To goodwill;
• To intangible assets recognised in the financial statements for the financial year current on 31 December 2019. This means that all types of intangible assets recognised in the balance sheet are eligible for revaluation.

The Budget Law 2021 also offers the possibility of having the higher value attributed in the financial statements of the financial year following the financial year of reference for the revaluation taken into account for income tax and IRAP purposes.

This is possible through the payment of the 3% substitute tax (or, with surcharges, 10%) to income tax and IRAP equal to 3% for depreciable and non-depreciable assets.

Current regulations governing the revaluation of business assets

The following regulations currently regulate the revaluation of business assets:

• The Budget Law 2020 (paragraphs 696 to 704 of Article 1 of Law No. 160 of 2020) regulates the revaluation of business assets.

  The revaluation of corporate assets was enhanced by the August Decree. This introduced the possibility to revalue business assets and participations by paying only 3 per cent of the increased revalued value. However, franking can also be performed by paying a substitute tax of 10 per cent.

• The 'August Decree' (Article 110 of Decree-Law No. 104 of 2020) introduces the new revaluation of business assets.

• The 'Liquidity Decree' (Article 6-bis of Decree-Law No. 23 of 2020) regulates the free revaluation of hotel assets.

☝ The revaluation of business assets presented by the August Decree is currently only planned for 2020 and adds information to the revaluation introduced by the Budget Law 2020.

It included the permission to revalue business assets and participations shown in the balance sheet in 2020/2021/2022 by paying a substitute tax at a rate of 12% for depreciable assets and 10% for non-depreciable assets.

• The new paragraph 8-bis of the Budget Law 2021, amending Article 110 of Decree-Law No. 104 of 2020, authorises the applicability of the revaluation also in other cases. These are: to goodwill and other intangible assets resulting from the financial statements of the financial year current on 31 December 2019.

👀 Please note that, with the asset revaluation provided for by the Budget Law of 2021, it is possible to revalue each individual asset. This means that it is not necessary to revalue the entire homogeneous category.

The same law provides for a possible redemption of the asset balance of the revaluation (either in full or only in part) through the application of IRAP (i.e., the Regional Tax on Productive Activities), a substitute tax on income tax and any additional taxes at 10%.

Through the payment of these taxes, i.e. IRAP at the rate of 3% for depreciable and non-depreciable assets and the substitute tax for income taxes, it is possible to recognise the higher value attributed to the assets and participations from the following financial year.

☝ The substitute taxes must be settled in a maximum of three instalments. The due date of the first instalment coincides with the deadline for the payment of the balance of the income tax relating to the tax period in which the revaluation took place. The due date of the second and third instalments coincides with the deadline for the payment of the balance of income tax for the following tax periods.

Deadlines for the Revaluation of Business Assets

The revaluation of business assets, in order to be admissible, must refer to assets that must

• Be recognised in the financial statements relating to the relevant financial year, i.e. the current financial year as at 31 December 2019 ( = financial statements closed as at 31 December 2019 for entities with a financial year coinciding with the calendar year);
• have been revalued in the financial statements relating to the financial year following the reporting year, i.e. the current financial year as at 31 December 2020 ( = financial statements as at 31 December 2020 for parties with a financial year coinciding with the calendar year).

Normally, statutory depreciation is determined, in the revaluation year, on the old values. Instead, depreciation on higher values is normally deferred to the following year.

In practice, this means that the balance sheet closing on 31.12.2020 will not have to contain the higher depreciation values resulting from the revaluation. Instead, these values must be included in the year ending 31/12/2021.

However, the revalued cost and the related reserve will already be included in the balance sheet closed on 31/12/2020.

Criteria for the Revaluation of Business Assets

In the aforementioned Article 11 of Law No. 342/2000, it is specified that the values recorded in the financial statements following a revaluation must never exceed the values actually attributable to the assets themselves. In this formulation, 'values actually attributed' means:

• The current value of the assets, i.e. that which is identified by reference to quotations on regulated markets.
• The internal value of the assets, i.e. that relating to their consistency, their productive capacity and their actual economic possibility of use in the business.

👀 According to the regulations and, in particular, according to the Assonime Circular of 7/2/2013 no. 2, it is not necessary to draw up a special appraisal of the assets subject to revaluation.

In fact, it is possible to simply use data obtainable from price lists or from transactions carried out for similar assets, or consideration reported, if necessary, in preliminary purchase and sale agreements, and so on.

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Types of Revaluation of Business Assets

The revaluation of business assets must be carried out by adopting one of the types provided for and set forth in Article 5 of Ministerial Decree 162/2001, namely

a. Revaluation of the historical cost of the asset only.

With this revaluation technique, the lower value of an asset is levelled off to the value it assumes in the current market.

☝ In the event of disposal of the asset: the new historical cost and, consequently, the new net book value ( = historical cost - accumulated depreciation) will be valid only if the disposal is completed within the 4th period following the revaluation (2024).

In the case of a disposal at an earlier date, the net book value prior to the revaluation will be taken into account in order to determine the presence of any capital gains or losses.

b. Revaluation of historical cost and accumulated depreciation.

In order to apply this revaluation method, the revaluation coefficient (CR) must be taken into account, obtained by means of the following formula

maximum revaluation / net book value on 31/12/2020*.

* The net book value in the year preceding the revaluation must be taken into account.

This second type of business asset revaluation provides for a shorter depreciation period, but higher depreciation than the first technique (point a.).

c. Reduction or decrease in depreciation provision.

Methodology that allows the useful life of the asset to be extended.

☝ Revenue Agency Circular No. 22 of 6/5/2009 provides for the possibility of using more than one revaluation method for the same asset. For example, it is possible to revalue the historical cost in part and reduce the depreciation fund for the excess.

The subject of business revaluations can be quite intricate for any company... we hope we have helped you to gain clarity in this accounting topic! In case you have any doubts or uncertainties, don't hesitate to share them with us! Leave a comment in the appropriate section, we will endeavour to get you an answer as soon as possible!