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Italy: guidelines on estimating the cost of capital in valuations for financial statements and impairment tests

published on 7 November 2025 | reading time approx. 3 minutes

In July 2025, the Italian Council of Chartered Accountants and Accounting Experts (CNDCEC) published the research paper "Additional risk factors in the cost of capital for financial statement valuations and impairment tests", drawn up by the "Financial Statement Valuations" Study Commission. The paper addresses an issue of growing importance for the drafting of financial statements and conduction of impairment tests, areas in which determination of the cost of capital is a key variable.

The role of the cost of capital in national and international accounting standards

In the context of the most common professional valuation experiences, the cost of capital plays a central role in impairment testing for the valuation of shareholdings and goodwill, in relation to accounting standard OIC 9 (Impairment for permanent losses in value) and to international accounting standards IFRS 3 (Business Combinations) and to IAS 36 (Impairment of Assets).

The objective of the research paper

The paper aims to provide theoretical and practical guidance on correctly identifying and measuring risk factors affecting the weighted average cost of capital (WACC). In practice, the mere application of the CAPM does not always allow all a company’s risk profiles to be captured.

The CNDCEC notes that, in the case of specific operating or contextual conditions, additional risk premiums may be necessary and these may significantly alter the discount rate used in Discounted Cash Flow models.

Additional risk factors in the cost of capital

Of the main factors considered, the paper focuses on:

country risk premium, which reflects the political, economic or currency uncertainties of the context in which the company operates, normally estimated through the yield differential between government bonds of countries with different credit ratings;
size premium, which recognises that smaller companies have a higher level of operational and financial risk, estimated on the basis of their structural characteristics and degree of economic and financial soundness;
execution risk (the risk of executing a business development plan), which concerns the company's ability to implement its business plans, particularly relevant in cases of start-ups, restructuring or turnaround processes.

The paper also focuses on the concept of total beta—a coefficient that captures both systematic and specific risk. This metric proves especially valuable in situations where individual risk premiums cannot be reliably estimated or where shareholders lack sufficient diversification.

Stand-alone and aggregate perspective

An important paragraph of the paper concerns the distinction between stand-alone and aggregate perspectives.

In the first case, typical of valuations of stand-alone companies or shareholdings, additional risk factors must be considered in relation to the characteristics of the company.

In the second case, when evaluating Cash Generating Units that are part of a larger group, the shareholding structure becomes a key consideration. In companies with a broad, diversified shareholder base, specific risks are neutralized. Conversely, in family-owned or entrepreneur-led businesses, additional risk premiums become more significant.

Conclusions

Although not binding, the paper is a useful reference for valuation professionals, helping to standardise practice and promote a consistent and documented approach to determining the cost of capital.

According to the CNDCEC, valuations based on technically sound and prudent analysis enhance the quality of economic and financial information, while also reinforcing stakeholder trust. This approach strengthens the valuation professional’s role as a guarantor of transparency and reliability throughout the valuation process.

In an environment where valuations are becoming ever more complex and the responsibility of valuation professionals ever greater, the robustness of methodology and the consistency of underlying assumptions are crucial. These help generate credible values and informed decisions, ultimately supporting sustainable financial reporting and long-term business strategies.