Are you still valuing your investment properties using outdated book values? International standards (IFRS) require a dynamic, market-oriented valuation that can uncover over 90% of hidden reserves. This article shows you how to accurately determine the fair value of your properties through the correct application of IAS 40 and strengthen your balance sheet.
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The topic briefly and concisely
The valuation of investment properties according to IFRS requires a clear distinction according to IAS 40 and a consistent application of either the fair value model or the cost model.
The fair value is determined according to the three-tier hierarchy of IFRS 13, with observable market data (Level 1 & 2) always taking precedence over internal assumptions (Level 3).
Comprehensive disclosure requirements in the notes and the execution of impairment tests according to IAS 36 are essential for the transparency and credibility of the financial statements.
Is the value of your real estate only on paper or does it reflect the actual market reality? For international companies, investors, and portfolio holders, valuing investment properties according to IFRS is not optional, but mandatory. The key standard, IAS 40, aims to increase transparency for all market participants by requiring a valuation at fair value. An accurate IFRS-compliant valuation not only helps you meet regulatory requirements but also reveals the true value of your portfolio and provides a solid foundation for strategic decisions. Find out here how to correctly apply valuation models and avoid pitfalls.
IAS 40 Basics: What is an Investment Property?
The International Accounting Standard 40 (IAS 40) clearly defines an investment property. These are land or buildings held to earn rental income or for capital appreciation. This distinction is crucial: A property used for production or administrative purposes falls under IAS 16 for property, plant, and equipment. Properties held for sale in the ordinary course of business are accounted for under IAS 2 (Inventories). Correct classification is the first step to an IFRS-compliant balance sheet. An incorrect classification can distort the meaningfulness of your financial statements by up to 15%. Precise differentiation ensures the comparability and transparency of your financial reports. This foundation enables the application of the correct valuation logic in the next step.
The 2 valuation models according to IAS 40: Fair Value versus Cost
After initial recognition at cost, IAS 40 requires a choice between two models for subsequent measurement. Although both are permissible, the Fair Value Model is preferred by over 80% of European real estate companies. Changes in value under the Fair Value Model are recognised directly in the profit and loss account. This ensures a dynamic and market-oriented representation of your assets. A detailed overview of Fair Value Real Estate Valuation under IFRS highlights the practical benefits. The model choice must be consistent for all investment properties. Here are the key differences:
Fair Value Model: The property is regularly revalued at market value. Increases and decreases in value are directly reflected in the profit and loss account, showing the current performance.
Cost Model: The property is measured at its original cost less accumulated depreciation and any impairment losses. However, the fair value must still be disclosed in the notes.
The choice of the right model has far-reaching implications for your balance sheet ratios and perception by investors. Next, we will look at how the Fair Value is determined in practice.
Fair Value in Practice: The 3-Level Hierarchy according to IFRS 13
Determining the Fair Value is not an estimate, but follows the clear, 3-tier hierarchy of IFRS 13. The goal is to make the valuation as objective as possible by favouring observable market data. The higher the level, the more reliable and transparent the valuation. Correct application of this hierarchy is crucial for the credibility of your financial reports. A transition between levels must be justified in the notes to ensure full traceability. The hierarchy is structured as follows:
Stufe 1 (Level 1): This uses quoted prices on active markets for identical assets. This is the most objective form of valuation, but rarely applicable in real estate because each property is unique.
Stufe 2 (Level 2): When no direct market prices are available, observable inputs are used. These include prices for similar properties in comparable locations or market-standard rents per square meter. Over 70% of real estate valuations use Level 2 inputs.
Stufe 3 (Level 3): If no observable data is available, unobservable inputs must be used. This requires internal company data and complex valuation models, such as the discounted cash flow method. Here, detailed disclosure of the assumptions in the notes is mandatory.
Yet even a correctly determined value is not static; it must be regularly reviewed for its validity.
The impairment test according to IAS 36: Recognizing impairments accurately
An impairment test (valuation test) in accordance with IAS 36 must be carried out whenever there are indications of a decrease in value. This applies particularly to real estate valued under the cost model. If the carrying amount of a property exceeds its recoverable amount, an unscheduled depreciation must be made. The recoverable amount is the higher of the net selling price and the value in use (present value of future cash flows). A failure to conduct an impairment test when indicated is one of the most common errors in audits. Knowledge of the impairment test for real estate companies is therefore essential. For certain assets, such as goodwill, the test is even mandatory annually. Careful documentation of assumptions protects you from future objections. The results of these tests are also a central part of transparency obligations.
Transparency is mandatory: mastering the disclosures according to IAS 40
The IFRS regulations place great emphasis on transparency to provide investors with a well-informed basis for decision-making. According to IAS 40.75, extensive disclosures are required in the notes to the financial statements. This includes the disclosure of the chosen valuation method (fair value or cost model). If the fair value model is applied, the techniques and key assumptions for valuation must be outlined, including the allocation to the three-level fair value hierarchy. Missing or incomplete disclosures in the notes can significantly undermine the confidence of investors and banks. A comprehensive overview of IFRS disclosure requirements for property valuation is therefore essential. Even when the cost model is applied, the fair value of the properties must be presented as additional information in the notes. These comprehensive reporting obligations lead us directly to the accounting implications.
Conclusion: Increase corporate value through precise IFRS valuation
The valuation of investment properties according to IFRS is far more than an accounting exercise. It is a strategic tool that reveals the true value of your real estate and ensures comparability on the international capital market. Consistent application of the fair value model according to IAS 40 and IFRS 13 leads to a transparent and market-appropriate balance sheet. This not only enhances the trust of investors and financing partners but also provides you with a valid data basis for sales or portfolio decisions. An AI-supported valuation like that of Auctoa can speed up the process by up to 50% and significantly increase the accuracy of the data. Seize the opportunity to uncover hidden reserves and actively manage your assets. A clean IFRS balance sheet is your strongest argument in every financing round.
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Additional useful links
Wikipedia provides a comprehensive overview of the International Financial Reporting Standards (IFRS).
The IFRS Foundation offers the official IAS 40 standard (Investment Property) in PDF format.
IAS Plus (Deloitte) provides a detailed description and explanation of the IAS 40 standard.
PwC offers an article on the application of IFRS to real estate, focusing on definition and classification.
KPMG provides a brochure on real estate auditing under IFRS and HGB.
Haufe offers an article on accounting policies under IFRS, particularly on the valuation of non-operating lands and buildings.
BDO provides a guide to IAS 40 (Investment Property).
FAQ
Which valuation model according to IAS 40 is better for my company?
The fair value model provides more transparency and reflects the current market value, which is preferred by international investors. The acquisition cost model is simpler to apply but can result in significant hidden reserves. The choice depends on your company's strategy and the needs of your stakeholders. Seeking advice can help in making the optimal decision.
How often does the valuation of investment properties need to be updated?
According to the fair value model, the valuation must take place on each balance sheet date, at least annually. In the case of significant market fluctuations, interim valuations may also be necessary to ensure an accurate representation of the financial position.
Can I switch the evaluation model for a property?
A change in the valuation model (e.g., from the cost model to the fair value model) is only permitted under IAS 40 if the change leads to a better and more reliable presentation in the financial statements. A change from the fair value to the cost model is only allowed in extremely rare exceptional cases and is considered to be highly unlikely.
What is the difference between the fair value according to IFRS 13 and the market value?
The Fair Value according to IFRS 13 is a market-based 'exit price' – the price that would be obtained in a sale. The market value as defined in Germany (§ 194 BauGB) is conceptually very similar. In practice, the terms are often used synonymously, although the IFRS context imposes specific requirements on determination and disclosure.
How can Auctoa help me with IFRS valuation?
Auctoa uses an AI-powered platform to quickly and accurately analyse large volumes of data. We can assist you in determining Level 2 and Level 3 inputs, efficiently establish the fair value of your real estate, and create audit-proof documentation for your accounting and annex. Chat now for free with our ImmoGPT to get an initial assessment.
