The amendments made by the Italian Accounting Standard Board (Organismo Italiano di Contabilità - OIC) to accounting standard No. 16, on tangible fixed assets concern the general reorganisation of the subject matter and a better coordination with the provisions of the other OIC national accounting standards. In particular, among the new developments brought about by OIC 16, we highlight the following:
- Effective as of 2014 financial statements, it shall be necessary to strip the value of buildings from the value of the land on which they stand. In order to calculate the value allocated to the land, it is necessary to distinguish the case in which the area has been purchased separately or not.
If the area has been purchased separately, it is necessary to make reference to the value inferable from the accounts or from the sale and purchase deeds.
If the land has been purchased together with the building without there being any separate consideration for the land in the purchase deed, OIC 16 states that, for depreciation purposes, the value of the building must be stripped, also based on estimates. In this case, the value of the land must be calculated as residual balance, after having first stripped the value of the building.
Consequently, in addition to the estimate of the land referred to the moment of purchasing the building, it is possible to use other criteria, such as values identified by the Council decisions for ICI (council tax) and IMU (local property tax) tax purposes of the building areas at the time of the purchase.
In addition to the criteria above, it is however possible to also calculate the value of the areas based on the relevant estimate in a survey drafted as at 31 December 2014. Such a survey will show a value for the area and for the building as at such date. The percentage ratio between the two values could be applied to the book value in order to be able to distinguish the value of the building from that of the area.
Failing any such survey, it is possible to identify the value of the land based on a lump-sum valuation criterion allocating the unit cost as a percentage over the cost for the building.
- Some implementation aspects related to the rules on the depreciation process have been clarified. In particular:
The provision under which depreciation was to be suspended for yielders not used for a long time has been removed; indeed, also in these special situations the asset, even if not used, is subject to technical and economic obsolescence, thus, it also needs to be subject to the depreciation process.
Should the tangible fixed asset include components having a service life different from that of the main yielder, the depreciations of the different components must be calculated separately; it is believed that such behaviour is more correct and makes the recording easier at the moment in which the component is replaced.
It is specified that depreciation must be interrupted if the residual value is at least equal to the yielder's book value.
With regard to the methods of depreciation, it is stressed that the method preferred for calculating the depreciation is straight-line depreciation. However, it is ok to use the depreciation on a reducing balance method when it leads to a better ratio between the depreciation of the cost for the asset and the expected profits, whilst the progressive depreciation method is not permitted, since it is against the principle of prudence.
- The rules on the compounding of financial charges has been amended by acknowledging, provided that of significant nature, the possibility to compound specific and general (i.e. resulting from loans not for a specific purpose) financial charges, proportionally to the duration of the making or performance of the yielder, and based on the weighted average of the relevant financial charges.
- In regards to the recording of the tangible fixed assets purchased for free, it is specified that such assets must be recorded under the assets of the balance sheet based on the 'expected market value as at the purchase date', gross of any additional costs incurred (or to be incurred), in order for them to be included in the productive process in a durable manner; the value thus calculated must be recorded in the extraordinary management of the profit and loss account, under item E20 'earnings'.
- Regarding the assets intended for sale, the requirements under which, if met, such assets must be reclassified under the working capital have been clarified. Such assets must be valued at the lower of the net book value and the realisation value inferable from the market trend, to be deemed as the net realisation value, that is, the sale price during normal management, net of direct sale and divestment costs.
- It is also clarified that any write-down of fixed assets previously revalued must be allocated to the profit and loss account, unless if otherwise provided for by law.
- As for equipment grants, compared to the previous version of the accounting standard, it is specified that such grants must be recorded at the moment in which there is reasonable certainty as to the fact that the conditions foreseen for acknowledging the grant are met and that the grants will be paid; they must be recorded in the event of finally acquired grants.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.