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Financial Statements: Valuation Criteria for Tangible Assets and Depreciation

Suspension of Depreciation – Allocation of Profits to Reserve – Method of Release of Reserve

The management of tangible and intangible assets represents a crucial aspect in the preparation of the annual financial statements. The suspension of depreciation, provided for in Art. 60 co. 7-ter of DL 104/2020 (converted into L. 126/2020), requires the establishment of an unavailable reserve and defines precise procedures for its release.

Unavailable Reserve and Mode of Release

If depreciation of fixed assets is suspended, companies are required to establish an unavailable reserve. The release of this reserve can be done in two main ways:

  1. During the Normal Depreciation Process
  2. At the Time of Sale of the Fixed Asset

Release During the Normal Depreciation Process

The release of the reserve during the normal depreciation process occurs in parallel with the recognition of suspended depreciation allowances in the balance sheet. This process can follow two distinct scenarios:

  • Extension of the Useful Life of the Asset: If the suspension of depreciation is accompanied by the extension of the useful life of the asset, the release of the reserve takes place in the fiscal years following the end of the original depreciation period. This practice allows the financial impact to be diluted over time, ensuring more sustainable management of suspended depreciation.
  • Inability to Extend Useful Life: If the useful life of the asset cannot be extended, the reserve is released in the fiscal years immediately following the suspension of depreciation. This scenario requires careful planning to avoid imbalances in the operating budget.

Release at the Time of Sale of the Fixed Asset

Alternatively, the reserve can be released when the fixed asset exits the business through sale. This method synchronizes the release of the reserve with the disposal of the asset, resolving the issue of the unavailable reserve in a single transaction. It is a viable solution when extending the depreciation process is not feasible.

Timing of Reserve Release

The release of the reserve takes place when the financial statements are approved and profits are allocated. The accounting entry relating to the release is recorded in the following fiscal year, ensuring the necessary transparency and compliance with accounting regulations. However, detailed information must be included in the Notes to the Financial Statements for the year in which the conditions for the release of the reserve accrue.

Implications for the Preparation of Financial Statements

The changes introduced by the legislation require scrupulous management of fixed assets and unavailable reserves. The suspension of depreciation may provide temporary relief for companies, but it also imposes disclosure and accounting requirements that must be strictly observed to maintain transparency and stakeholder confidence.

Proper application of the valuation criteria and the manner in which the reserve is released is essential to ensure that the financial statements accurately reflect the financial position of the enterprise. Transparency and compliance with accounting regulations remain key pillars for effective and sustainable management of financial statements.

For further details and insights, please refer to the full reading of DL 104/2020 and L. 126/2020.

Sources:

  • Decree-Law No. 104 of August 14, 2020, converted with amendments by Law No. 126 of October 13, 2020
  • TUIR – Consolidated Income Tax Act