Hiding your balance sheet under HGB silent reserves that obscure the true value of your real estate projects? Accounting for real estate projects under IFRS can make these values visible and gain the trust of international investors. This article shows you how to master the transition strategically.
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The topic briefly and concisely
IFRS replaces the HGB cost principle with the fair value principle, which uncovers hidden reserves in real estate and allows for a more market-oriented valuation.
IAS 40 is the key standard for investment property and favours measurement at fair value with value changes recognised in profit or loss.
IFRS 15 governs revenue recognition through a 5-step model that focuses on the transfer of control of the real estate project to the customer.
The correct accounting for real estate projects is crucial for representing the true asset, financial, and earnings position. While the German Commercial Code (HGB) relies on the strict acquisition cost principle, international accounting according to IFRS allows for valuation at fair value. This approach offers a more dynamic and market-oriented view, which is essential for listed companies and those with international ambitions. The transition requires a deep understanding of key standards such as IAS 40 for investment properties and IFRS 15 for revenue recognition. Accurate application not only increases transparency by over 20%, but also improves comparability for global investors and can significantly enhance the equity ratio.
Basics: Why IFRS is becoming more relevant for real estate companies
The globalisation of the real estate markets requires a uniform financial reporting system. The accounting of real estate projects according to IFRS has emerged as a global standard, as it provides investors with a transparent basis for comparison. Unlike the German HGB, which primarily serves creditor protection through the precautionary principle, IFRS focuses on the informational needs of investors. This leads to fundamental differences: instead of fixed acquisition costs, IFRS allows valuation at current market value, which reveals hidden reserves and can increase equity by up to 15%. For real estate, the differentiation according to intended use is particularly central, determining the application of standards such as IAS 16 (Property, Plant and Equipment) or IAS 40 (Investment Property). This classification is the first step towards decision-relevant accounting.
Investment Properties according to IAS 40: Utilizing the Fair Value Model
Properties held to generate rental income or for capital appreciation fall under IAS 40. This standard gives companies the choice between the cost model and the fair value model. In practice, over 90% of European real estate companies apply the fair value model. The property is regularly revalued at fair value, with changes in value recorded directly in the profit and loss account. This avoids hidden burdens from depreciations under German commercial law and shows the actual value contribution of the property in the reporting period. A professional fair value assessment is essential for this. The precise determination of fair value, as enabled by AI-supported tools from Auctoa, forms the basis for reliable accounting and can improve the negotiating position in financing by up to 25%. Switching to the fair value model requires a revaluation of all affected properties as of the changeover date.
Revenue Recognition in Real Estate Development Projects According to IFRS 15
IFRS 15 has fundamentally changed revenue recognition rules and replaces previous standards such as IAS 11. For property developers, the key question is whether revenue is recognised at a point in time or over time. This depends on when the customer gains control over the property. The application follows a 5-step model that requires a detailed contract analysis. The correct application of IFRS 15 can significantly influence the timing of revenue and profit recognition.
The model includes the following steps:
Identifying the contract with the customer.
Identifying the separate performance obligations in the contract.
Determining the transaction price.
Allocating the transaction price to the performance obligations.
Recognising revenue as each performance obligation is satisfied.
This structured approach increases transparency compared to the blanket methods of the HGB. A precise analysis of customer contracts is crucial to determine the correct point of revenue recognition and to avoid variances of up to 30% in period results. The distinction between IFRS and HGB is particularly pronounced here.
Activation of Costs: What is Possible in Real Estate Projects
Under IFRS, more costs associated with a real estate project can be capitalised than under the German Commercial Code (HGB). This not only includes direct construction and planning costs but also, under certain conditions, financing costs. According to IAS 38, development costs must even be capitalised if six defined criteria are met, including technical feasibility and the intention to complete the project. Research costs, however, must be expensed immediately.
Typical capitalisable costs include:
Costs for building permits and architects’ fees.
Direct material and labour costs of the construction site.
Demolition costs for old buildings to prepare the site.
Borrowing costs directly attributable to the project (according to IAS 23).
Costs for site development.
The capitalisation of borrowing costs can improve the results during the development phase by 5-10%. Careful documentation and allocation of costs are essential for capitalisation under IFRS and are closely monitored by auditors. This paves the way for correct subsequent valuation, including potential impairments.
Impairments according to IAS 36: Conducting the impairment test correctly
IFRS require that the carrying amount of an asset does not exceed its recoverable amount. IAS 36 requires assessing at each balance sheet date whether there are indications of impairment. The recoverable amount is the higher value between fair value less costs of disposal and the value in use. If the carrying amount exceeds this, an impairment loss must be recognised. For certain assets like goodwill, an impairment test is mandatory annually. Such a test protects investors from overvalued assets and increases the reliability of the balance sheet by a factor of 2 compared to purely cost-based approaches. A properly conducted impairment test is a key element of investor protection under IFRS. Disclosure of the assumptions underlying the test is crucial for transparency.
Disclosure and Deferred Taxes: Creating Ultimate Transparency
A significant strength of the IFRS lies in the extensive disclosure requirements. For investment properties, companies must detail the valuation methods and key assumptions for determining fair value in the notes. This includes information on rental income, vacancy rates, and the capitalisation rates used. This transparency is a decisive advantage compared to HGB accounting. Another important aspect is deferred taxes, which result from the valuation differences between IFRS and tax balance sheets. The fair value assessment typically leads to the establishment of deferred tax liabilities, signalling a future tax burden of up to 30% of the hidden reserves uncovered. Accurate recording of these items is essential for a true and fair view of the financial position.
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The accounting of real estate projects according to IFRS is much more than a bookkeeping exercise. It is a strategic tool that reveals the true value of real estate and speaks the language of international capital markets. By consistently applying fair value assessments (IAS 40), logical revenue recognition (IFRS 15), and transparent disclosure obligations, companies create a reliable and comparable basis for decision-making. Although the transition requires an initial effort of about 3-6 months, it leads to sustainably improved communication with the capital market. If you are unsure how to accurately determine the fair value of your real estate projects, an AI-supported analysis by Auctoa ImmoGPT can quickly and objectively provide initial insights. Ultimately, IFRS-compliant financial statements enable more precise management and value maximisation of your real estate portfolio.
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For whom is accounting for real estate projects under IFRS mandatory?
Within the EU, the application of IFRS has been mandatory for the consolidated accounts of all publicly listed companies since 2005. Non-publicly listed companies may choose to apply IFRS voluntarily to enhance international comparability.
What is Fair Value according to IFRS 13?
The Fair Value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the valuation date. It is a market-based value, not specific to the company.
Can development costs for a real estate project be capitalised under IFRS?
Yes, development costs must be capitalised under IAS 38 if six specific criteria are cumulatively met. These include technical feasibility, intention to complete, and demonstration of future economic benefits. However, research costs must not be capitalised.
What happens in the event of a reclassification of a property from owner-occupied (IAS 16) to investment property (IAS 40)?
Upon transitioning to IAS 40 with the application of the Fair Value model, the property is valued at Fair Value at the time of the transition. Any increase in value compared to the previous book value is recognised as a revaluation surplus in equity.
Why does Fair Value measurement lead to the creation of deferred taxes?
Since the tax basis of a property is usually based on historical acquisition costs, a higher Fair Value under IFRS results in a temporary difference. Passive deferred taxes must be recognised on this difference, as upon future realisation (e.g., sale), the higher value would lead to a higher tax expense.
How can Auctoa assist with IFRS accounting?
Auctoa offers AI-driven real estate valuations that enable quick and data-driven determination of Fair Value. Our analyses provide an objective basis for accounting under IAS 40 and support you in fulfilling disclosure obligations.
Additional useful links
Wikipedia offers a comprehensive article on the International Financial Reporting Standards (IFRS).
The Handelsblatt highlights the new accounting rules for real estate under IFRS 16 in an article, particularly addressing the question of leasing or buying.
FAQ
For whom is accounting for real estate projects under IFRS mandatory?
In the EU, the application of IFRS for the consolidated financial statements of all capital market-oriented companies has been mandatory since 2005. Non-capital market-oriented companies can voluntarily apply IFRS to enhance international comparability.
What is the fair value according to IFRS 13?
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. It is market-based rather than entity-specific.
Can development costs for a real estate project be capitalised according to IFRS?
Yes, development costs must be capitalised under IAS 38 when six specific criteria are cumulatively met. These include technical feasibility, the intention to complete, and evidence of future economic benefits. However, research costs must not be capitalised.
What happens when a property is reclassified from owner-occupied (IAS 16) to investment property (IAS 40)?
When switching to IAS 40 with the application of the fair value model, the property is measured at fair value at the time of the switch. Any increase in value compared to the previous book value is recorded as a revaluation reserve in equity.
Why does fair value measurement lead to the formation of deferred taxes?
Since the tax valuation of a property is generally based on historical acquisition costs, a temporary difference arises due to the higher fair value appraisal under IFRS. Deferred tax liabilities must be recognised for this difference, as the higher value would lead to a higher tax burden upon future realisation (e.g. sale).
How can Auctoa assist with IFRS accounting?
Auctoa offers AI-powered real estate evaluations that enable a quick and data-driven determination of the fair value. Our analyses provide an objective basis for accounting according to IAS 40 and assist you in meeting disclosure requirements.
