How do you ensure that the value of your real estate fund assets reflects reality? Transitioning from the German Commercial Code (HGB) to international standards is more than just a formal obligation; it is a strategic tool for value representation. This article shows you how proper accounting of real estate funds according to IFRS can increase transparency for investors and enable informed decision-making.
Chat with ImmoGPT for free now.
With access to Google, BORIS, and Deep Research.
The topic briefly and concisely
The accounting of real estate funds according to IFRS focuses on the market-oriented fair value assessment, thereby increasing transparency for investors.
IAS 40 defines what an investment property is and establishes the fair value model as the preferred valuation method.
IFRS 13 governs the methodology for fair value measurement through a three-level hierarchy designed to ensure the objectivity of the data used.
A realistic valuation of real estate assets is essential for heirs, owners, and professional investors. While German accounting according to HGB traditionally serves creditor protection through the prudence principle, accounting according to International Financial Reporting Standards (IFRS) focuses on the information needs of investors. The crucial difference lies in the valuation: instead of historical acquisition costs, the fair value becomes the focus. This leads to a more dynamic and market-oriented representation of the financial position, which is especially important for real estate funds. The correct application of the standards, particularly IAS 40 and IFRS 13, is crucial for compliance and meaningful financial reporting. In this article, we guide you through the key regulations and show the practical implications.
Basics of IFRS: Why Fair Value Measurement is Crucial for Funds
The primary objective of IFRS is to provide decision-relevant information for capital market participants. Unlike German GAAP (HGB), which insists on the strict historical cost principle, IFRS allow and require investment property to be measured at fair value. For real estate funds, whose success depends directly on rental income and value appreciation, this market-oriented approach is essential. It enables a transparent representation of the actual economic performance and significantly enhances the comparability between different funds. The central regulations for this are found in IAS 40 (Investment Property). This standard defines which properties are to be classified as investment properties and sets the basis for their accounting treatment. Consistent application leads to a balance sheet that reflects not the past, but the current value potential. This establishes the foundation for determining the Net Asset Value (NAV), one of the most important metrics for fund investors. The precise method for determining this value is further specified in the next stage by IFRS 13.
IAS 40 in detail: The fair value model as standard for investment properties
Der Standard IAS 40 ist das Kernstück für die Bilanzierung von Anlageimmobilien. Eine Immobilie wird dann als „Investment Property“ klassifiziert, wenn sie zur Erzielung von Mieteinnahmen oder zur Wertsteigerung gehalten wird – und nicht für die eigene Nutzung oder den Verkauf im normalen Geschäftsverlauf. IAS 40 stellt Unternehmen vor die Wahl zwischen zwei Bewertungsmodellen für die Folgebewertung: dem Anschaffungskostenmodell und dem Fair-Value-Modell. Während das Kostenmodell den Regeln des IAS 16 für Sachanlagen folgt, hat sich für Immobilienfonds das Fair-Value-Modell als De-facto-Standard durchgesetzt. Der Grund ist einfach: Wertänderungen, sowohl Gewinne als auch Verluste, werden direkt und erfolgswirksam in der Gewinn- und Verlustrechnung erfasst. This ensures a 100% up-to-date representation of performance. Die Kriterien für eine Klassifizierung als Investment Property sind klar definiert:
The property is held to generate rental income.
The property is held for long-term capital appreciation.
A combination of both is also possible.
The property is not used by the business itself (production, administration).
Die Entscheidung für das Fair-Value-Modell muss für alle als Finanzinvestition gehaltenen Immobilien einheitlich getroffen werden. How precisely this value is determined is one of the key challenges in practice.
Valuation according to IFRS 13: The three levels of the fair value hierarchy
While IAS 40 governs the 'what', IFRS 13 defines the 'how' of fair value determination. The standard establishes a three-tier hierarchy that reflects the objectivity of the input factors used for the valuation. The aim is to maximise transparency and comparability of valuations. The choice of level has a direct impact on the reliability of the value. Therefore, a data-driven fair value property valuation is essential. The hierarchy is structured as follows:
Level 1: This involves using unadjusted quoted prices in active markets for identical assets. For most properties, this level is not applicable as each property is unique.
Level 2: Valuation is based on observable inputs that are not Level 1 prices. These can be prices for similar properties in comparable locations or prevailing market rents.
Level 3: When little or no observable market data is available, unobservable inputs come into play. Here, valuation models like the discounted cash flow (DCF) method are used, which are based on assumptions about future income and costs.
Particularly with Level 3 valuations, utmost care and expertise are required. Digital tools like Auctoa ImmoGPT can assist in making well-founded, data-driven assumptions, thus enhancing objectivity. The differences compared to traditional German valuation methods are significant.
IFRS vs. HGB: Uncovering Significant Differences in Property Valuation
The conceptual divide between IFRS and HGB is deep, especially concerning real estate. The HGB adheres to the principles of prudence and acquisition or production costs, which often lead to the formation of hidden reserves. In contrast, IFRS aims to present an image that reflects the actual economic value with Fair Value accounting. For investors, this implies up to 30% greater transparency regarding the actual asset situation. The key differences between IFRS and HGB can be summarised as follows:
Measurement basis: IFRS utilises the market value (Fair Value), whereas HGB relies on (carried-forward) acquisition or production costs.
Recognition of value increases: According to IFRS, unrealised gains from value increases are recognised in profit or loss. HGB strictly prohibits this (Realisation Principle).
Objective: IFRS primarily serves to inform investors (decision relevance), whereas HGB aims to protect creditors (prudence principle).
Impact on key figures: Fair Value accounting under IFRS may result in potentially higher and more volatile representations of equity and earnings.
These differences make a direct comparison of financial statements impossible and underscore the necessity of understanding the respective accounting system. Another significant aspect of IFRS is the extensive reporting obligations.
Transparency through Disclosure: The Requirements under IAS 40 and IFRS 13
A central feature of IFRS is the high importance placed on disclosures. They are intended to enable the reader of the financial statements to understand the valuations made and to assess the associated uncertainties. For investment properties held at fair value, the disclosure requirements under IFRS are particularly extensive. Among the minimum disclosures are, for example, the valuation methods applied and a justification for their selection. Moreover, the key assumptions underlying the valuation must be disclosed, especially in the case of level-3 valuations. A reconciliation showing the change in the carrying amount from the beginning to the end of the reporting period is also required. Particularly important for investors are sensitivity analyses that demonstrate how the fair value would change with a modification of key assumptions (e.g., a 0.5% change in the discount rate). This transparency builds trust and enables investors to make informed risk assessments. In addition to the pure valuation, impairments and lease agreements are also relevant.
Impairments and Leasing: Focus on Impairment Tests and IFRS 16
Even though the fair value model prevails, IFRS recognises the concept of impairment. An impairment test under IAS 36 becomes relevant when there are indications of impairment and the cost model is applied. Another important standard for real estate funds is IFRS 16 for leases. Since its introduction in 2019, lessees are generally required to recognise a right-of-use asset and a lease liability on the balance sheet for all lease agreements. This ended the previous practice of keeping operating leases "off-balance sheet," meaning only in the notes. For real estate funds that lease properties, this leads to a lengthening of the balance sheet and a more transparent illustration of actual obligations. The correct recognition of these items can affect the debt ratio by 5-15%. The complexity of IFRS regulations requires a careful and ongoing engagement with the standards.
bilanzierung-von-immobilienfonds-ifrs
Accounting for property funds under IFRS is much more than a bookkeeping exercise. It is a commitment to transparency and market orientation, meeting the needs of modern investors. The consistent application of the fair-value principle according to IAS 40 and IFRS 13 provides a realistic representation of assets and performance. This enables you as an owner or investor to make informed decisions and to understand and communicate the full value potential of your property investments. A precise, data-driven evaluation is the key to success in this demanding regulatory environment. Use the possibilities of IFRS to build trust and strategically manage your property values.
Additional useful links
The IDW Publishing House (Institute of Public Auditors in Germany) offers a PDF document on IFRS 16 (Leases).
The project page of the ASCG (Accounting Standards Committee of Germany) provides information on the topic of leases.
The IFRS Foundation makes information on IFRS 16 (Leases) available on its official site.
PwC offers a publication on the application of IFRS in the real estate industry.
Deloitte provides comprehensive information on the International Financial Reporting Standards (IFRS).
KPMG publishes an article on investments and investment funds.
EY presents a survey on the real estate industry in the context of IFRS.
FAQ
What role does IFRS 9 play in the accounting of real estate funds?
IFRS 9 is primarily relevant to financial instruments. In the context of real estate funds, the standard mainly affects the valuation of receivables from rental income. According to IFRS 9, expected credit losses on these receivables must be recognized, which requires more forward-looking risk provisioning than previous standards.
How does IFRS 16 affect a real estate fund that leases out its properties (lessor)?
For the lessor, little has changed with IFRS 16. They must continue to classify leases as either operating leases or finance leases. In the case of an operating lease, the leasing income is recognized on a straight-line basis over the term, and the property remains as an investment property on the fund’s balance sheet.
Can the assumptions for fair value be easily changed?
No, the valuation assumptions, especially for Level 3 assessments, need to be well-founded, documented, and consistent. Significant changes to the assumptions or the valuation model must be explained and justified in the appendix to ensure comprehensibility for the financial statement recipients.
What happens if the fair value of a property cannot be reliably determined?
In the rare case that the fair value of an investment property cannot be reliably determined at initial recognition, IAS 40 requires the use of the cost model in accordance with IAS 16. This applies until the property is disposed of, even if a reliable valuation becomes possible at a later date.
Are the costs for an expert to determine fair value eligible for capitalization?
No, the costs for the valuation of properties (e.g. surveyor fees) should be recorded as current expenses in the period in which they occur. They are not part of the acquisition or production costs of a property.
How often does the fair value assessment need to be conducted?
The IFRS require a fair value measurement at each balance sheet date. For high accuracy and to meet reporting obligations, especially for publicly listed funds, quarterly valuations by external, independent experts are often used in practice.
