Maximise your balance sheet security: The acquisition cost model for real estate according to the German Commercial Code (HGB)
Is your property valuation built on a solid foundation? The acquisition cost model according to HGB is mandatory for many companies, but its rigid rules can obscure the true value of your assets by more than 20%. Understand the method to minimize balance sheet risks and seize strategic opportunities.
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The topic briefly and concisely
The acquisition cost model according to the German Commercial Code (HGB) values real estate at historical cost less regular depreciation, primarily serving creditor protection.
Acquisition costs include not only the purchase price but also ancillary costs such as property transfer tax, notary and brokerage fees, which can amount to 10-15% of the value.
The method results in the creation of hidden reserves, as increases in market value are ignored, rendering the balance sheet conservative but inaccurate for strategic decisions.
Is the value of your real estate as shown on your balance sheet truly insightful? For companies reporting under the German Commercial Code (HGB), the answer is often sobering. The historical cost model real estate valuation HGB prescribes a valuation at historical costs, systematically carried forward. This approach ensures stable, cautious balance sheets but completely disregards market developments. A property might be listed in the books at 500,000 euros, while its market value has already reached 1.5 million euros. This discrepancy poses significant risks for financing discussions, sales strategies, and company valuation. This article precisely breaks down the method, highlights its limitations, and explains how you can reveal the true value of your real estate for informed decision-making.
Foundation of valuation: The acquisition cost principle according to § 253 HGB
The valuation of real estate in fixed assets follows a clear principle according to the German Commercial Code (HGB): the cost principle. According to § 253 para. 1 HGB, assets may not be recognized at more than their acquisition or production costs. This principle is a cornerstone of German accounting law and primarily serves creditor protection through the principle of prudence. It prevents unrealized gains from mere market value increases from being reported, making the balance sheet up to 30% more conservative than under international standards. The book value thus reflects the original investment, not the current market value. This method ensures high comparability and stability of the balance sheets over the years. Knowledge of the exact composition of these costs is the first step towards a correct HGB-compliant valuation. Next, these acquisition costs must be determined precisely.
Precise valuation: All components of acquisition costs according to § 255 German Commercial Code (HGB)
What exactly counts as acquisition costs? § 255 paragraph 1 HGB defines them as all expenses incurred to acquire a property and make it operational. A common mistake is to consider only the pure purchase price, which can undervalue the balance sheet amount by 10-15%.
Several components make up the acquisition costs:
The purchase price of the property: This is the net purchase price excluding VAT.
Acquisition ancillary costs: These often account for a significant portion and include items such as real estate transfer tax (depending on the federal state 3.5% to 6.5%), notary fees (approximately 1.5%), and land registry fees (approximately 0.5%).
Brokerage commissions: If incurred, these are also part of the capitalizable ancillary costs.
Subsequent acquisition costs: Costs for significant expansions or improvements that exceed the original state are also capitalized.
Reductions in acquisition price: Any discounts, rebates, or bonuses received must be deducted from acquisition costs.
The correct recording of all ancillary costs is crucial for an accurate starting point of the valuation. A precisely determined value for operational properties according to HGB is the basis for the next step: planned depreciation.
Planned depreciation: Correctly accounting for scheduled depreciation
After initial recognition at cost, the process of scheduled depreciation begins. According to Section 253 (3) HGB, the cost of depreciable assets must be reduced by scheduled depreciation. For real estate, this applies exclusively to the building, as land is considered non-depreciable and therefore not subject to depreciation. Allocating the total purchase price between land and building is therefore a critical step, often assigning 15-40% of the value to the non-depreciable land. For buildings completed after 31 December 1924, the straight-line depreciation is generally 2% per year over a useful life of 50 years. Correct depreciation reduces the book value annually by a fixed amount. For example, a building with a cost of 800,000 euros is depreciated annually by 16,000 euros. This system of valuation under HGB and IFRS fundamentally differs. But what happens in the case of unforeseen impairments that go beyond normal wear and tear?
Unexpected Impairments: The Extraordinary Amortisation as a Corrective
The HGB addresses unforeseeable, permanent value losses with extraordinary depreciation. If the fair value of a property is below the book value due to a foreseeable permanent impairment as of the balance sheet date, extraordinary depreciation must be undertaken (§ 253 para. 3 sentence 5 HGB). This follows the mitigated imparity principle for fixed assets. An impairment is deemed permanent if it persists over a period of 3 to 5 years. Reasons can include structural damage, negative site development, or a drastic decline in market prices by more than 20%. This depreciation is not optional but a requirement to uphold the principle of prudence. Should the reasons for the impairment later cease to exist, the obligation to write back applies (§ 253 para. 5 HGB): the value must be written up again, no higher than the amortised cost. These regulations for market value determination in the HGB highlight the model's limitations, especially when compared to international standards.
HGB versus IFRS: A system comparison with strategic implications
The acquisition cost model property valuation HGB is in direct contrast to the fair value valuation according to the International Financial Reporting Standards (IFRS). While the HGB aims at creditor protection and capital preservation, IFRS focuses on providing decision-relevant information for investors. This leads to fundamentally different accounts, whose values can differ by 30-50% from each other.
The key differences can be summarised as follows:
Measurement Basis: HGB uses the (carried forward) acquisition costs. IFRS allows or requires (depending on the model) valuation at fair value, i.e., the current market price.
Value Fluctuations: Under HGB, increases in value beyond acquisition costs are ignored. According to IFRS, market value changes are recorded in profit and loss statements.
Hidden Reserves: HGB systematically leads to the formation of hidden reserves. IFRS valuation aims to reveal these and show the true value.
Objective: HGB protects creditors through cautious valuation. IFRS aims to present investors with a realistic view of the financial situation ('True and Fair View').
The choice of accounting standard has a massive impact on equity ratio and company metrics. Understanding these different valuation methods is crucial to recognising the strategic disadvantages of a purely HGB approach.
Strategic Disadvantages: The Hidden Reserves and Their Risks
The consistent application of the cost model leads to the creation of significant hidden reserves. This difference between the low book value and the often increased market value, sometimes by 100% or more, is a buffer for tough times but contains substantial strategic risks. A company that does not know its property values makes decisions based on incomplete data. Financing can fail due to a seemingly low equity ratio, even though assets exceed 1 million euros. A sales decision might be made on a book value of 400,000 euros, while the market would pay 1.2 million euros. Hidden reserves obscure a company's true economic strength and potential. To bridge this gap and make informed decisions, an external, market-based valuation is essential. Here, an AI-supported analysis like the Auctoa ImmoGPT can provide an initial, data-driven assessment of the actual market value within minutes and reveal the hidden potential of your real estate. Knowledge of the disclosure obligations for property valuations is another important aspect.
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The acquisition cost model real estate valuation HGB offers a reliable and conservative method for accounting, which serves to protect creditors. It creates stable book values, but these can underestimate the economic reality of your real estate values by up to 50% or more. The resulting hidden reserves are a safety net, but also a source of strategic missteps that can impede company growth by 5-10% per year. Therefore, for forward-looking corporate management, it is essential to supplement HGB book values with regular, market-based valuations. Only those who know the true value of their assets can optimize financing, maximize sales potential, and lead their company into the future on a solid, comprehensive data basis.
Additional useful links
Haufe provides a commentary on acquisition costs versus revaluation model in the individual financial statements.
KPMG offers a brochure on property audits according to IFRS and HGB.
Beck eLibrary contains a document dealing with relevant accounting issues.
Wikipedia offers a comprehensive article on acquisition and production costs.
ESV eLibrary has a book available that is relevant to accounting.
IWW Institut publishes an article on the valuation of real estate in fixed assets in the financial statement.
Institut der Wirtschaftsprüfer (IDW) provides an important statement on accounting with IDW ERS IFA 3.
NWB Database contains a document dealing with relevant accounting issues.
Gesetze im Internet (Federal Ministry of Justice) provides the full legal text of the German Commercial Code (HGB).
Federal Ministry of Finance offers the official depreciation tables (AfA tables) on its website.
FAQ
How does the acquisition cost model affect my balance sheet ratios?
The model tends to result in a lower equity disclosure and a reduced balance sheet total compared to the actual market value. This can make metrics like the equity ratio appear worse, even though there are substantial hidden reserves within the company.
Do I need to make an extraordinary depreciation if the market value of my property decreases?
Yes, if the impairment is expected to be permanent. According to the moderated lower of cost or market principle, the German Commercial Code (HGB) prescribes a write-down to the lower fair value to comply with the principle of prudence.
Can I switch from HGB valuation to IFRS valuation?
A transition is possible but complex, and primarily relevant for capital market-oriented companies. They can also prepare an IFRS financial statement in parallel to provide investors with a more market-relevant picture, while the HGB financial statement remains for tax purposes.
What useful life is used for the depreciation of buildings according to the German Commercial Code (HGB)?
The HGB does not specify an exact useful life, but in practice and by analogy with tax regulations, a useful life of 50 years (2% depreciation per annum) is often used for residential buildings, and 33.3 years (3% depreciation per annum) is used for commercial buildings.
How do I determine the value share of land and property when buying real estate?
The allocation of the purchase price between the building and the land is crucial, as only the building is depreciated. This is often done using standard land values or an expert appraisal. A tool provided by the Federal Ministry of Finance also offers a recognised method.
What is the reinstatement rule?
According to Section 253, Paragraph 5 of the German Commercial Code (HGB), the requirement to recover value obliges a company to reverse a previous extraordinary depreciation (to make a write-up) if the reasons for the impairment have ceased to exist. The upper limit is the continued acquisition cost.
