Does the book value of your real estate projects reflect their true economic condition? An incorrect valuation in the individual financial statements according to HGB can lead to hidden burdens and unexpected financial risks. This article will show you how to avoid pitfalls and establish a solid, compliant valuation basis.
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The topic briefly and concisely
In the HGB single-entity financial statements, real estate projects are valued up to the acquisition or production costs; any increase in value beyond that remains invisible.
The strict principle of lower of cost or market requires an immediate write-down to a lower market value, even if the impairment is only temporary.
Provision for anticipated losses must be made as soon as it becomes apparent that project costs will exceed revenue, in order to anticipate future losses.
The evaluation of real estate projects for individual financial statements according to the German Commercial Code (HGB) is a central challenge for developers, investors, and owners. Unlike international standards, the focus here is not on the speculative market value, but rather on the strict principle of prudence. The correct recognition of production costs and the consistent application of the lower of cost or market principle are crucial to accurately reflect the company's financial stability and protect creditors. A precise implementation not only ensures compliance with the HGB but also strengthens the trust of banks and business partners through a transparent and realistic representation of the financial position. We guide you through the crucial evaluation steps.
Foundation of the Valuation: The Cost Principle
The basis for the valuation of real estate projects in the HGB individual financial statements is § 253 para. 1 HGB. This stipulates that assets must not be recognised at more than their acquisition or production cost, reduced by depreciation. Increases in value beyond these historical costs may not be recorded, even if the market value of the project has risen by 20%. This principle serves to protect creditors by preventing the recognition of unrealised gains and creating hidden reserves. Strict adherence to this upper limit is the core of conservative HGB valuation. A detailed examination of the HGB valuation of land shows the consistent application. Therefore, the accurate determination of capitalisable costs is the first critical step for correct accounting.
Determine and activate production costs correctly
The definition of production costs according to § 255 paragraph 2 HGB is crucial for the amount of the balance sheet item. An incomplete activation can result in equity being understated by up to 15%. Costs that must be capitalised include not only direct material and production costs. Many overlook that appropriate portions of overhead costs must also be capitalised. The acquisition cost model for real estate provides further insights on this matter. Precise allocation is essential for the value retention of the balance sheet.
The following cost categories must be considered:
Direct material costs (e.g., building materials)
Direct manufacturing costs (e.g., wages for construction workers)
Special direct manufacturing costs (e.g., costs for special construction plans)
Material and production overhead costs (e.g., depreciation on construction machinery)
General administrative costs (optional capitalisation)
Expenditure for social facilities (optional capitalisation)
After all costs have been correctly capitalised, these values must be checked for their value retention at each balance sheet date.
Recognizing impairments through the strict principle of lower of cost or market value
For real estate projects classified as current assets, the strict principle of lower of cost or market applies in accordance with § 253 Abs. 4 HGB. If the fair value on the balance sheet date—such as the expected selling price—falls below the capitalized production costs, an extraordinary depreciation (write-down) must be made. Suppose a project has production costs of €2 million, but the achievable market price decreases to €1.8 million; a depreciation of €200,000 is mandatory. This obligation to depreciate also applies to temporary impairments. The difference between IFRS and HGB is particularly evident here. While the HGB urges caution, there are future risks in addition to already occurred impairments that must be accounted for in financial statements.
Reflect future risks with provisions for impending losses
A floating transaction, such as a developer contract, can turn into a loss-making business. If it becomes apparent that total project costs exceed the contractually agreed revenues, a provision for anticipated losses must be made according to § 249 para. 1 HGB. For example, if a company expects revenues of €10 million, but the projected total costs amount to €10.5 million, a provision of €500,000 must be set aside. This provision anticipates the loss before it is actually realised. The correct accounting of construction projects requires careful foresight. The complexity of valuation further increases when considering the demarcation between national and international accounting standards.
HGB versus IFRS: The Principle of Prudence versus Fair Value
The valuation philosophies of HGB and IFRS are fundamentally different. The HGB, with its principle of prudence, aims to protect creditors and prohibits the recognition of hidden reserves through write-ups beyond historical costs. In contrast, the IFRS focuses on the informational needs of investors and allows valuation at fair value under IAS 40. A real estate project might be recorded in the balance sheet at a 25% higher value under IFRS than under HGB. This discrepancy leads to a systematically lower equity ratio in HGB financial statements. Therefore, the choice of accounting standard has significant implications, as shown by the comparison of valuation methods. These differences in valuation directly affect the disclosure obligations in the notes.
Creating Transparency: Disclosure Requirements in the Appendix
The appendix is a central component of the annual financial statement and must explain all applied accounting and valuation methods. Inadequate documentation can worsen the rating with banks by up to 10%. For real estate projects, detailed information is essential to clearly present the asset situation. Clear appendix details are not a bureaucratic burden but a tool for building trust. To manage this complexity, an Auctoa valuation provides the precise, data-driven market values you need for HGB-compliant accounting and transparent disclosure. Chat with our ImmoGPT now for free to clarify any initial questions.
The following information must be disclosed at a minimum:
The valuation methods applied to real estate projects.
The criteria for distinguishing between production and maintenance costs.
Exceptional write-downs carried out and the reasons for them.
The composition and development of provisions for expected losses.
Any contingent liabilities from the projects.
Thorough documentation of these points is the final building block for an unassailable annual financial statement.
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The valuation of real estate projects for individual financial statements according to HGB requires more than just adding up invoices. It demands a consistent application of the prudence principle through correct production costs, strict adherence to the lower of cost or market principle, and proactive provision for reserves. Only careful and transparent accounting protects against financial risks and builds the necessary trust with investors. An HGB-compliant financial statement is the foundation for sustainable entrepreneurial success.
Additional useful links
Gesetze im Internet provides the exact wording of § 253 of the Commercial Code (HGB) concerning the valuation of assets.
Gesetze im Internet makes the complete Commercial Code (HGB) available online.
Institut der Wirtschaftsprüfer (IDW) publishes a statement (IDW RS IFA 3) on accounting.
Statistisches Bundesamt (Destatis) provides official information on construction prices and the real estate price index.
Deutsche Bundesbank offers statistics on real estate and construction service prices.
Gesetze im Internet includes the Real Estate Valuation Ordinance (ImmoWertV) from 2022.
Bundesverband deutscher Banken discusses in an article the financing of affordable housing.
Karlsruher Institut für Technologie (KIT) provides a PDF document from the Karlsruhe School of Production on real estate valuation.
FAQ
May I revalue a property in the HGB financial statements if its market value has increased?
No, an appreciation above the original acquisition or production costs is strictly prohibited under HGB. There is a strict upper limit to prevent reporting unrealised gains.
What role does the intention of use play in the application of the principle of lower of cost or market?
The intended use determines whether the property is classified as fixed assets or current assets. The strict lower-of-cost-or-market principle applies to current assets (intent to sell), while for fixed assets (permanent use), the mitigated principle is applied, where depreciation only occurs in the event of a likely permanent impairment in value.
Do I need to create a provision for impending losses even if the loss is not yet certain?
Yes, a provision for an onerous contract must be made as soon as a loss from an executory contract is more likely than a profit or a balanced result. Mere possibility is not sufficient, but absolute certainty is not required either.
Are the architect's fees part of the production costs?
Yes, the costs for architects and building planners are part of the ancillary construction costs and thus included in the production costs that need to be capitalised.
What happens if the reason for a write-down no longer applies?
If the value of a property increases again after depreciation, there is an obligation to write up according to the German Commercial Code (HGB) (value recovery requirement). However, the value may only be adjusted up to the continued acquisition or production costs.
