Fair Value Property Valuation according to IFRS: How to Maximise the Transparency and Accuracy of Your Balance Sheet
Are you wondering if the value of your real estate on the balance sheet reflects the actual market value? An incorrect valuation can distort equity and mislead investors. This article shows you how to ensure clear and reliable figures with Fair Value real estate valuation according to IFRS.
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The topic briefly and concisely
IFRS 13 defines Fair Value as a market-based 'Exit Price' and establishes a consistent framework for its determination.
IAS 40 governs the accounting for investment properties and provides an option between the fair value model and the cost model.
The three-level fair value hierarchy (Levels 1-3) classifies the quality of valuation inputs and is crucial for transparency and disclosure requirements.
The accurate valuation of real estate assets is crucial for globally operating companies. The International Financial Reporting Standards (IFRS) require a market-oriented valuation, which often differs from national standards like the HGB. Central to this is the Fair Value real estate valuation according to IFRS, a concept aimed at transparency and comparability. It defines the value as the price that would be achieved in a sale under usual market conditions (Exit Price). This guide walks you through the key regulations of IFRS 13 and IAS 40, explains the valuation models, and shows how to ensure valuation quality and avoid pitfalls. This way, you can establish a solid basis for strategic decisions and strengthen investor confidence.
Fundamentals: What does Fair Value mean according to IFRS 13?
IFRS 13 defines Fair Value as a market-based measurement. It represents the price you would receive when selling an asset in an orderly transaction between market participants on the measurement date. This standard standardises the determination of fair value, which was previously regulated by various standards such as IAS 40. The focus is on the perspective of an external market participant, not the specific intentions of the reporting entity. The emphasis is on the so-called 'Exit Price', or a disposal value. Since its introduction for financial years beginning on or after 1 January 2013, IFRS 13 provides a consistent measurement framework. Correct application is the first step to transparent valuation in accordance with international standards. This creates a reliable basis for further analysis of your real estate values.
The Fair Value Hierarchy: Ensuring the Quality of Evaluation
To minimise subjectivity in assessment, IFRS 13 establishes a three-level hierarchy for the valuation inputs used. This classification makes the reliability of a valuation understandable for investors and analysts. The higher the level, the lower the objectivity of the data. Proper classification is essential for the required disclosures.
The hierarchy is structured as follows:
Level 1: This involves using unadjusted quoted prices in active markets for identical assets. For real estate, this level is rarely applicable due to their uniqueness.
Level 2: This level utilises directly or indirectly observable inputs that do not fall within Level 1. This includes prices for similar properties in active markets or comparable rental yields.
Level 3: This uses unobservable inputs based on the best available information, often internal company data. For most real estate valuations, Level 3 inputs such as projected cash flows or capitalisation rates are crucial.
The choice of the correct level significantly influences the credibility of the valuation and the complexity of the disclosure requirements.
Special Case Investment Properties: The Role of IAS 40
While IFRS 13 defines the 'how' of fair value measurement, IAS 40 governs the accounting for properties held as financial investments (Investment Properties). These are plots of land or buildings held to generate rental income or for capital appreciation, rather than for personal use. IAS 40 grants companies the choice of subsequent measurement method, which must be applied consistently to all investment properties. The decision directly impacts the volatility of the profit and loss statement as well as equity. A deep understanding of the differences between IFRS and HGB is crucial for accurate accounting. The choice of model is therefore a strategic decision with far-reaching consequences.
Fair Value Model vs. Acquisition Cost Model: A Strategic Decision
According to IAS 40.30, companies can choose between two methods for subsequent measurement. Each method has different impacts on the financial statements and requires careful consideration.
Here are the key differences:
Fair Value Model: The property is regularly revalued to its fair value. Changes in value, whether gains or losses, are recognised immediately and in full in the profit and loss account. This leads to high transparency but can also cause the performance indicators to fluctuate significantly.
Cost Model: The property is measured at its original acquisition or construction cost, less accumulated depreciation. This model is similar to the valuation according to the German Commercial Code (HGB) and results in more stable outcomes, but it does not reflect current value increases. Instead, the fair values must be disclosed in the notes.
The majority of pure real estate companies apply the Fair Value Model to reflect the true value of their portfolio. The choice of the right method is a central element of the valuation of investment properties.
Challenges and Risks in Practice
The fair value real estate valuation according to IFRS is not without pitfalls. One of the biggest challenges is determining reliable values when no active markets exist. This often leads to the use of valuation models with Level 3 inputs, which provide significant discretion. Even small changes in assumptions such as discount rates or vacancy rates can influence the fair value by millions. This volatility can lead to significant fluctuations in the financial results and make comparability between years difficult. Moreover, the valuation requires in-depth expertise to correctly apply the 'highest and best use' principle. To minimize these risks, precise and data-driven valuation is essential, as supported by an Impairment Test under IFRS. The proper handling of these factors determines the acceptance of the financial statement.
Disclosure Obligations: Transparency as the Top Priority
Transparency is key to the credibility of fair value measurement. IFRS 13 requires extensive disclosures in the notes to provide financial report users with deep insight into the valuation. For each class of assets, companies must disclose the valuation techniques and inputs used. The requirements are particularly detailed for valuations based on Level 3 inputs. Here, quantitative information about the significant, unobservable inputs must be provided. This also includes a sensitivity analysis that shows how the fair value would change with changes in these inputs. This information enables investors to assess the quality of the valuation and the associated uncertainties themselves. Clear documentation is therefore not only mandatory, but also a sign of professional corporate governance and helps to better plan the tax implications. Fulfilling these obligations is the final building block for an IFRS-compliant valuation.
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The Fair Value Property Appraisal under IFRS is more than a mere accounting exercise. It is a tool for strategic clarity and builds trust among international investors and financial partners. Consistent application of IFRS 13 and IAS 40 ensures a realistic representation of your property values and uncovers hidden reserves or risks. Even though implementation is complex, the benefits of a transparent and market-oriented balance sheet outweigh the challenges. The key to success lies in a data-driven, objective, and comprehensible value assessment. Uncertainties in valuation? The Auctoa ImmoGPT chat or an informal initial consultation with our experts can help you quickly obtain a preliminary assessment and set the right direction. An accurate valuation is the foundation for your success.
Additional useful links
Wikipedia offers a comprehensive overview of IFRS 13, the international accounting standard for fair value measurement.
The IFRS Foundation provides detailed information about IFRS 13, the standard for fair value measurement, on its official site.
The IFRS Foundation offers the IAS 40 standard for investment property on its official site.
The Institute of Public Auditors in Germany (IDW) publishes IDW S 10, a statement on business valuation.
The Federal Statistical Office provides comprehensive information on construction prices and real estate price indices in Germany.
KPMG offers a brochure on real estate valuation under IFRS and the German Commercial Code (HGB).
WTS publishes an article on IFRS 13 – fair value measurement.
The University of Regensburg provides a dissertation on the accounting of real estate investment funds.
The NWB Database offers an entry on a relevant topic in the field of accounting.
FAQ
What exactly is the fair value according to IFRS 13?
The fair value is the price that would be received for selling an asset or paid for transferring a liability in an orderly transaction between market participants on the measurement date. It is a market-based value, not a company-specific value.
Which properties fall under IAS 40?
Investment properties fall under IAS 40. These are properties held to earn rental income or for capital appreciation, and not for own use in the production or administrative process.
What is the difference between the fair value model and the cost model according to IAS 40?
Under the fair value model, properties are accounted for at market value, and changes in value are recognised in the profit and loss account. Under the cost model, the property is valued at the acquisition cost minus depreciation, similar to the German Commercial Code (HGB). However, the fair value must still be disclosed in the notes.
What are Level 3 inputs in the fair value hierarchy?
Level 3 inputs are data not observable in the market that are used for valuation. In real estate, these typically include company-internal assumptions about future cash flows, vacancy rates, or capitalization rates. Their use requires particularly extensive disclosure obligations.
Why is an external appraisal useful for accounting under IFRS?
An external, independent evaluation by experts enhances the objectivity and credibility of fair value determination. It minimizes the risk of misjudgments and strengthens the trust of auditors, investors, and banks in financial reporting.
How can Auctoa assist with fair value real estate valuation under IFRS?
Auctoa provides AI-supported, data-driven real estate valuations that create an objective and comprehensible basis for fair value determination according to IFRS. Our analyses help you meet requirements for transparency and accuracy and make informed strategic decisions.
