Balance update

The update of balance sheets consists of the revaluation of the equity elements that are part of the balance sheet, with the intention of reflecting the current real value of said elements, based on the increase in the cost of living derived from inflation or higher prices.

A balance sheet reflects the book value of the assets of a company. This value usually consists of the acquisition cost of the item, so it does not vary over the years. With the update of balance sheets, it is intended that the balance sheet reflects the real value of the assets of the company and not the cost of acquisition of the same.

Reasons for updating the balance sheet

One of the main objectives of the balance sheet is to reflect a true image of the financial situation of the company. However, as we have commented previously, the most common is that the balance sheet items are valued by the acquisition cost rule.

But the following case may occur: a building acquired fifteen years ago whose acquisition cost was € 150,000 and its current market value is € 250,000. On the balance sheet, this building appears valued at € 150,000, but its current value is € 250,000. Therefore, the balance sheet is not reflecting a true picture of the financial situation of the company. With the balance update an attempt is made to alleviate this above.

On the other hand, with the balance sheet update, the company's equity situation is strengthened. This is so because balance sheet items increase in value, so the company's equity also increases in value. This allows a double improvement in the financing of the company:

• Improvement in the internal financing of the company, due to this increase in the value of equity.
• Improvement in the external financing of the company, since an improvement in the financial situation of the company also increases the guarantees that can be offered for the request for external financing and, therefore, it will be easier for financial institutions to lend money to it. business.

Finally, the State also usually benefits from this balance update. It is common for the revaluation of assets to be associated with a tax or a tax burden, which is usually lower than the income tax. In the previous example of the building, the acquisition cost was € 150,000 while the current value is € 250,000, so the revaluation is € 100,000. It is on these € 100,000 that the tax would be paid, provided that the State expressly provides for it.

How is the balance update carried out?

As a general rule, it is not allowed to update balances on a discretionary basis by a company. It is the legislator of each State who, from time to time (depending on inflation during that period), allows the updating of the balance sheets.

In short, a company cannot update a balance sheet whenever it wants. It is necessary for the legislator to allow it, by publishing regulations for updating balances.