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How the August Decree opened the way for a revaluation of balance sheet data in Italy

Brand Finance
05 October 2021
Sandro Feole
Manager & Financial Consultant

In the past, intangible value in Italy has been discussed with a certain reticence and scepticism. The fabric of small and medium-sized enterprises makes it difficult to enhance what is increasingly becoming the real value of companies in global business, and not just technological ones.

There are three essential points of view to contextualise these historic difficulties in understanding intangible value:

  1. The banking system has always been an essential pillar of the economy of Italian companies, especially small and medium-sized ones;
  2. The statutory rules on financial statements and the OIC accounting standards;
  3. Regulation of company defaults, which Italian courts have had to deal with over the last two decades.

Italian Banking System

Banks have always been highly sceptical about the inclusion of intangible values in the financial statements of the companies they analyse. There has been little emphasis on establishing clear methods to understand increasingly recognised know-how or patent value, not to mention other more taboo categories of intangible assets such as brand. To construct rating models, many banks - particularly larger institutions - still measure equity by subtracting disclosed intangible assets from the book value of equity. Evidently, this has disincentivised companies from recognising intangible value, and has penalised the most innovative companies. There is a total absence of alternative finance for small, innovative companies who instead rely on bank debt to fund growth. Therefore, many Italian companies have adjusted their disclosure towards what their financial partners agreed to truly recognise.

Statutory accounting & reporting rules

In terms of civil law principles, in addition to the provisions of Article 2426 of the Civil Code, to the most commonly used rules are the Italian accounting principles OIC, in particular principle no. 24 in points 78 and 79, which cover the devaluation and revaluation of intangible assets. These principles require systematic impairment testing as a criterion of prudence. However, the principles do not deal with the matter except for a reference to the possibility of revaluation only under special laws. In the Italian principles, the subject of intangible asset valuation is not present except in relation to acquisitions.

Company default

History dictates greater scrutiny and liability for the corporate bodies of administration and control, in the presence of insolvency procedures and particularly in the event of bankruptcy. The presence of intangible assets or intangible values has been, in several cases, the lever to profile offences of false accounting, with significant personal implications. It is not that Italy has been lacking in cases where the use of artifices has covered up illegal practices, but the Italian productive fabric is made up of working entrepreneurs not of fraud scientists, even if this shame is perceived internationally.

Reflecting on these historic challenges, it can be said that the Italian historical and regulatory context is not particularly mature when it comes to intangible values.

The pandemic has changed the wind. On 14th August 2020, a historic measure was introduced, known commonly as "August Decree" Decree Law 104., In the midst of the pandemic, the decree introduced an innovative and great opportunity for companies to revalue business assets - both tangible (as precedented) and intangible and equity investments. This opportunity concerns only OIC-adopter companies, so it is mainly aimed at the small and medium-sized enterprises that comprise a large share of the Italian businesses landscape

The August Decree opened the way for a revaluation of balance sheet data with or without tax effect. The difference lies in the price to be paid to have the values recognised for tax purposes. This price is in most cases 3% of the highest value entered in the balance sheet for each individual asset. The 3% revaluation
allows the values to be recognised for tax purposes as early as 2021 for depreciation and 2024 for capital
gains. Considering that taxation in Italy for corporations is 27.9%, the effect in terms of tax savings diluted over time is a significant 25%.

This historical novelty provides an opportunity for Italy to adopt corporate structures more aligned to what is required to operate effectively in a global market.

I believe the legislator, in a situation of absolute criticality such as the pandemic, has cut some red tape and introduced a unique opportunity that I hope Italian companies have fully grasped.

Measuring the solidity of a company by looking at how many square metres of industrial property it owns or, worse still, how many private homes its founder has, is what has characterised average company valuations to date, made in particular by the banking system. Today, there is the possibility of bringing out the real values and displaying them in the most representative document for stakeholders, the annual report.

In particular, Italian entrepreneurship is increasingly characterised by the ability to innovate and create; these are values that must be represented in a global market, otherwise small businesses will remain invisible to the market. In the growth phases of new projects or new lines of business, the intangible asset is the real foundation on which the development or sometimes the survival of some realities that post-Covid -19 will need to renew themselves.

Companies of the future

What are the DNA values of the most virtuous companies of the future? The average age of their employees, the hours of training invested in their development, the fidelity of relationships in terms of the number of years the relationship has lasted, innovative patents, brand identity, marketing and the ability to be recognised by their market, the ability to sell a new product or service: these are all values that we can define as useful and necessary for the future.

The August Decree has given an opportunity to take a more innovative look at the entire Italian economic system, from banks, to the tax authorities, to the courts; entrepreneurs need a new mentality of communicating externally how much intangible value their company possesses. This should certainly be done with prudence and conservatism, operating on the principles of fair value and sourcing independent parties to certify these values. Only by understanding and supporting intangible assets can you fully benefit from and communicate its value.

About the Author

Brand Finance is the world’s leading independent brand valuation and strategy consultancy. Headquartered in the City of London, we are present in over 20 countries.

For more than 20 years we have helped companies and organisations of all types to connect their brands to the bottom line.

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