Your inherited property is within the business assets – but what is the correct value? Choosing between HGB and IFRS can impact your balance sheet by over 20% and determine your financing opportunities.
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The topic briefly and concisely
The HGB prioritises creditor protection through conservative acquisition costs, creating hidden reserves.
IFRS aims to provide investors with information through market-based fair value measurement, which increases the balance sheet total and equity.
The choice of standard is a strategic decision that depends on the company's objectives (stability vs. capital raising).
Does your company's books include an inherited property, and you're wondering which valuation is appropriate? This decision has far-reaching consequences. While German GAAP relies on the acquisition cost principle for security, international IFRS reflect the true market value. This article explains the fundamental differences in the valuation of inherited properties according to IFRS vs. German GAAP, shows the impact on equity and profit, and provides you with a clear basis to strategically manage your company's value.
Fundamental decision: Creditor protection (HGB) vs. Investor information (IFRS)
The choice of accounting standard is a strategic decision with significant implications. The German Commercial Code (HGB) primarily aims to protect creditors. Its valuation methods are characterized by the principle of caution, which tends to result in lower and more conservative valuations. In contrast, the principle of IFRS is to provide international investors with as realistic a picture of the financial position, performance, and cash flows as possible (“True and Fair View”). This differing philosophy leads to valuation deviations of up to 30%. The decision for a standard, therefore, directly depends on your company's goals: stability and predictability or market-oriented transparency for investors. This fundamental orientation determines how your inherited property appears on the balance sheet.
HGB Valuation: The Principle of Historical Cost
According to § 253 HGB, fixed assets are valued at no more than the acquisition or production costs, less regular depreciation. For an inherited property in business assets, this means: Its value on the balance sheet is based on historical costs, not the current market value. Increases in value, which can often amount to 5-10% per year, remain invisible. This strict acquisition cost model ensures a stable balance sheet without major fluctuations. However, it creates hidden reserves that obscure the actual wealth of the company. Although an impairment loss must be recognised in the event of a permanent reduction in value, reversals are strictly limited. The consequence is often significantly undervalued property assets on the balance sheet.
IFRS Valuation: The Dynamics of Fair Value
The IFRS require that investment properties (IAS 40) be measured at fair value. This value corresponds to the current market price, i.e., the price that would be achieved in a sale on the balance sheet date. Changes in fair value are recognised directly in the profit and loss account. This leads to a transparent but also more volatile representation of the earnings situation. For an inherited property, this means that a positive market development directly increases equity and profit. An appraisal is essential for this. The advantages are obvious: A higher valuation improves the equity ratio, which can improve creditworthiness with banks by crucial percentage points. The fair value measurement is therefore key for internationally operating companies and those with capital needs.
The key differences in ratings at a glance
The comparison of the two systems highlights the strategic dimension of inheritance property valuation according to IFRS vs. HGB. Here are the key differences at a glance:
Valuation Basis: The HGB uses historical cost, while IFRS applies the current market value (Fair Value).
Capital Gains: Under HGB, hidden reserves and capital gains remain invisible; IFRS makes them immediately visible in the results.
Profit Presentation: Profits are smoothed by depreciation under HGB, whereas IFRS reflects market dynamics directly and is more volatile.
Purpose of Information: The HGB protects creditors through cautious valuation, while IFRS informs investors about the actual, current company value.
Depreciation: Scheduled depreciation is the norm under HGB. With IFRS, scheduled depreciation is omitted when valuing at Fair Value.
These differences have a direct impact on financial metrics and the market perception of your company.
Deferred Taxes: A Frequently Overlooked Consequence of Valuation Differences
The revaluation of a property to fair value according to IFRS almost always results in a higher value than in the tax balance sheet, which often follows the German Commercial Code (HGB). This difference between the IFRS value and the tax value is temporary. It triggers the obligation to create deferred tax liabilities. These deferred taxes represent a future tax burden and must be reported as liabilities in the balance sheet. This reduces the positive impact of the upwards valuation on equity. While the HGB offers the option of netting, IFRS requires a fundamental obligation to recognize all temporary differences. The correct handling of deferred taxes is complex and requires a detailed analysis to correctly allocate the tax expense on an accrual basis.
Strategic Decision for Heirs: When Does Each Standard Pay Off?
As the heir of a property transitioning into business assets, you are faced with an important choice. Although the pure inheritance tax is based on the valuation law, future accounting in the company follows either the German Commercial Code (HGB) or International Financial Reporting Standards (IFRS). The decision depends on your strategy. Are you planning to continue the business steadily without external capital providers? In that case, the HGB offers advantages with its stability and lower valuation effort. However, if you are seeking growth capital, want to attract international investors, or are preparing for a company sale, then an IFRS financial statement with realistic property values is almost always the better choice, as it reveals the true economic strength. A precise, AI-supported evaluation from Auctoa can provide a reliable data foundation for you within just 48 hours. Let our ImmoGPT advise you to navigate the complexity and make the right decision for your inherited property.
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The valuation of inherited real estate according to IFRS vs. HGB is much more than an accounting formality. It is an active management tool. The HGB offers conservative security and stability, which can be beneficial for traditional family businesses. In contrast, IFRS provides transparency and a market-based value disclosure, essential for capital market-oriented companies and during financing rounds. Your choice should be based on a clear analysis of your business objectives. The right valuation reveals the true value of your inherited property and thus lays the foundation for future success.
Additional useful links
KPMG offers a brochure on property audit according to IFRS and HGB.
Juhn provides information on IFRS standards in accounting.
The University of Regensburg publishes a dissertation on accounting.
Rödl & Partner offers an article on the significance of impairment tests according to IFRS and HGB.
The Federal Ministry of Finance provides information on inheritance and gift tax.
The Federal Ministry of Finance provides information on the valuation of real estate within the context of inheritance and gift tax.
The Federal Statistical Office offers information on construction and real estate price indices.
The Federal Statistical Office provides tables on house and land prices.
The Institute of Public Auditors in Germany (IDW) offers information on IDW S 10 appraisal report for determining the market value of properties.
Wikipedia offers an article on International Financial Reporting Standards (IFRS).
FAQ
Which valuation standard should I choose for my inherited property in the business assets?
If your company prioritises stability and straightforward accounting and is not seeking external financiers, the German Commercial Code (HGB) often suffices. However, if you plan to take out loans, attract investors, or sell the company, financial statements prepared in accordance with IFRS are clearly advantageous due to their transparency and higher valuation.
What are hidden reserves and how do they arise?
Hidden reserves are created when the actual market value of an asset (such as a property) is higher than its book value in the balance sheet. According to the German Commercial Code (HGB), this is the norm, as properties are recorded at their lower acquisition cost, while their market value increases over the years.
Are the costs for an IFRS expert opinion not very high?
The cost of a fair value appraisal is an investment. The benefits, such as improved creditworthiness, higher financing frameworks, or a better sale price for the company, generally far exceed the costs.
Does the choice between HGB and IFRS affect my inheritance tax?
No, not directly. The inheritance tax on business assets is determined according to the specific rules of the Valuation Act (BewG), usually using the simplified capitalized earnings method. The choice of accounting standard affects the company's financial statements, not the tax valuation for the inheritance.
What does 'latent taxes' mean in property valuation?
If you revalue a property higher under IFRS than its tax value, a temporary difference arises. You must recognise a 'deferred tax liability' in the balance sheet on this future taxable value increase. This is a liability that somewhat reduces the equity-enhancing effect of the revaluation.
Can I switch from HGB to IFRS?
Yes, a switch is possible, but it is a complex project. It requires a complete reassessment of all balance sheet positions on the transition date. Such a transition should be well planned and supported by experts.
