The finance law for 2021 allows companies to carry out a free revaluation of their assets, with a temporary tax neutralization mechanism. Christophe Like and Bertrand Sers, partners Walter France, explain the advantages and limitations of this provision and give managers the keys to choice, and implementation.
Every company has the possibility, at any time, to revalue certain assets on its balance sheet. When carrying out such a reassessment, it is immediately taxable on capital gains. The Finance Law for 2021 allows companies to benefit from a tax deferral on these capital gains (and not a deletion). What is the benefit for businesses? ? Increasing the value of your assets leads to, mechanically, improving the company's balance sheet. And a “nice” balance sheet greatly facilitates the granting of bank loans, including for start-ups, or signing contracts with new customers or partners, etc. Hence the interest of this measure, in this particularly difficult economic period. Many companies are therefore considering the possibility of exercising this option., because it allows tax to be deferred on unrealized capital gains, and improve the amount of equity in the social accounts. This tax neutralization measure concerns financial years ending from December 31, 2020 and until December 31, 2022., i.e. the 2020 financial years, 2021 and 2022 for companies that close their financial year on December 31.
What are the rules ?
Accounting, the revaluation difference only concerns tangible and financial assets. Revaluation of intangible assets is prohibited, as well as the revaluation of stocks or investment securities. The revaluation must cover all tangible and financial assets, once the option is exercised. Clear, it is not possible to go “shopping” and only revalue certain assets. On the tax front, this temporary neutralization regime distinguishes between non-depreciable fixed assets (planned tax deferment) and depreciable fixed assets (spread taxation). It is close to the favorable tax regime for mergers. For non-depreciable assets : in case of option for the temporary regime, the revaluation has no tax consequences. The possible transfer of the property in the future will be subject to taxation., at the time of sale, based on the unrevalued value of this property. For depreciable property : the option may have an impact on the calculation of tax over time, depending on the duration remaining to be amortized for each investment and the duration of reintegration of goodwill into the result. Companies must attach to their declaration of results for the revaluation exercise and subsequent financial years a statement showing the data necessary for calculating depreciation., provisions or capital gains or losses relating to revalued fixed assets.
Be rigorous during reassessment
Remember that if the company decides to activate this option, that is to say use this possibility of revaluing its assets with a tax deferral – this must apply to all tangible and financial assets. The evaluation process must therefore focus, and be justified, on all of these assets. However, it is possible to note that the current values of certain categories of assets are close to their net book value. : in this case they will not need to be re-evaluated. Attention : the company must be particularly rigorous in calculating these revaluations. These must be justified according to the usual valuation approaches specific to each asset. (example : real estate, titres, manufacturing lines…), and can under no circumstances be determined “on the corner of a table”. Let us recall the principle of a fair evaluation : the values must correspond to “the sum that a prudent and wise business manager would agree to pay to obtain it if he had to acquire it, taking into account the usefulness that its possession would present for the achievement of the objectives of society” (decree 77-550 of 1-6-1977, art.4). Each reassessment must be justified and carefully documented. Indeed, the revalued values will be looked at carefully by the auditors whose concern is to verify that the determined values are not overvalued. And in the event of a tax audit, these values will also be likely to be discussed by the administration. It is therefore better to “tuck in” your supporting documents.
Take certain precautions
Several points of attention should be noted. The AMF Financial Markets Authority has made recommendations in the past (ex : rapport COB 1980…) on the prudence of revaluations relating to companies in a structurally deficit tax situation (ex : start-up, companies in difficulty...). Evaluation in the context of Covid-19 is complex, particularly in the implementation of analog methods (decrease in transactions, evolution of real estate...). Median transaction multiples are at historically high levels, and there is a risk that these multiples will fall in the future. It exists for certain real estate assets, and particularly in the case of factories, situations where a utility value can be determined, but without real market value. The valuation methodology used for the revaluation of tangible and financial assets will serve as a reference in the future for impairment tests.. We must be careful to simulate developments, so that there are no probable scenarios likely to lead to depreciation in the near future. More generally, it will be important to verify that the revalued value of equity is not higher than the overall value of the company (by implementing, for example, the DCF method – Discounted Cash-Flow – or the multiple method).
Analyze the scope and cost of this operation carefully
For these different reasons, Christophe Velut and Bertrand Sers recommend that managers carry out a prior analysis of the scope and cost of such an approach. (as previously stated, it is not possible to go “shopping”, and to revalue only certain assets : even if ultimately, revaluation only concerns certain assets in practice, the analysis must be documented for all tangible and financial assets). The issues must be clearly identified (check for example that 
certain clauses in bank loan contracts – the covenants – do not exclude revaluation differences). Finally, it will be necessary to be careful and to adopt an approach close to that adopted in the context of contributions to real values. In this delicate context of pandemic, taking into account the issues, and when the impact is significant, companies and groups wishing to exercise this option will have every interest in being assisted in the process by an evaluator.
