Are you correctly valuing your real estate within business assets according to HGB? Errors can distort your balance sheet by up to 20% and leave hidden reserves untapped, directly affecting creditworthiness.
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The topic briefly and concisely
The HGB valuation is strictly based on the acquisition cost principle; the valuation must not exceed the historical costs (possibly reduced by depreciation).
An unscheduled write-down on property is only mandatory in the event of an expected permanent impairment in value (lower of cost or market principle).
If the reasons for an extraordinary depreciation no longer apply, there is an obligation to write up to a maximum of the amortised cost (write-up requirement).
The HGB valuation of land and buildings is not a tool for determining market values, but a legal obligation for correct accounting. It protects creditors through the strict principle of prudence and prevents the reporting of unrealised profits. Many companies fail to realise potential here, as the complexity of acquisition costs, depreciation, and the lower of cost or market principle is often underestimated. This article guides you through the four central valuation phases according to HGB and shows how you can optimise your balance sheet and minimise legal risks through precise application of the regulations. An accurate valuation is the foundation for strategic decisions and solid financial communication.
Laying the foundation: Accurately determine acquisition and production costs
The basis of every HGB valuation of land and buildings is the acquisition cost principle according to § 253 Para. 1 HGB. The valuation must never exceed the original acquisition or production costs. Acquisition costs include not only the pure purchase price but also all incidental costs, which can amount to up to 15% of the purchase price. These include the real estate transfer tax (3.5% to 6.5%), notary fees (approx. 1.5%), and broker commissions. In accounting, the purchase price must be divided between land and building, as land is not subject to regular depreciation. A precise allocation is crucial, as detailed in the acquisition cost model for real estate. This precise allocation prevents later valuation errors and ensures a correct depreciation basis for the building. Correctly capitalising all costs is the first step towards an unassailable balance sheet.
Managing Risks: Correctly Applying the Lower of Cost or Market Principle
Commercial law protects creditors through the prudence principle, which is reflected in the lower-of-cost-or-market principle. For real estate in fixed assets, the mitigated lower-of-cost-or-market principle under § 253 paragraph 3 HGB applies. An extraordinary write-down is mandatory only in the event of an expected permanent impairment. A market fluctuation of 10% is often considered temporary, whereas a value loss of 40% due to external factors such as noise pollution represents a permanent impairment. Financial assets can be written down under § 253 paragraph 3 sentence 6 HGB even for temporary impairments, which does not apply to real estate. Distinguishing between permanent and temporary impairment is crucial and requires a well-founded forecast. An incorrect assessment can lead to excessive or understated balance sheet valuations. Knowledge of the differences to the market value of a property is essential in this context.
Depicting Consumption of Value: Mastering Scheduled and Unscheduled Depreciation
Unlike properties, buildings lose value over time, which is recorded through regular depreciation. Straight-line depreciation spreads the acquisition or production costs evenly over the standard useful life, which is often between 33 and 50 years. A building with production costs of 2 million euros is depreciated annually by 40,000 euros over a useful life of 50 years. If there is an unforeseen, permanent impairment, extraordinary depreciation is applied. Reasons for this can include severe construction damage or negative site developments that permanently reduce the value below the book value. This depreciation immediately corrects the balance sheet value downwards and is mandatory under commercial law. Correct handling is of central importance for the valuation of commercial properties.
Unlocking Potential: Using the Attribution Requirement as a Corrective
The requirement to reverse impairment losses under § 253 (5) HGB is often overlooked, yet it holds significant potential for financial statements. If the reason for a previous impairment is eliminated, the value of the asset must be increased back up to the upper limit of the amortised cost. For instance, if a property was written down by 50,000 euros due to contamination and this issue is later completely resolved, the value must be increased by 50,000 euros. An increase beyond the original acquisition cost is strictly prohibited. This requirement ensures that the financial statement provides as accurate a picture of assets as possible, without artificially holding hidden reserves too low. The rules fundamentally differ from international standards, as illustrated by the difference between IFRS and HGB.
Strategically Decide: Understanding the Differences in Evaluation between HGB and IFRS
The valuation philosophies of HGB and IFRS could hardly be more different. HGB, with its prudence principle, aims at protecting creditors and strictly limits valuations to the (continued) acquisition costs. IFRS, on the other hand, focuses on providing information to investors with a 'True and Fair View'. According to IAS 16, properties may be valued at Fair Value, even if it exceeds the acquisition costs. This can increase a company’s equity on the balance sheet by more than 30% and improve creditworthiness. While HGB enforces hidden reserves, the IFRS valuation methods make these visible. Thus, the choice of accounting standard has direct strategic consequences for financing decisions and the presentation of the company.
Creating Transparency: Meeting Disclosure Requirements in the Appendix
A correct valuation alone is not sufficient; it must also be documented transparently in the annual financial statements. The appendix serves to explain and supplement the balance sheet and profit and loss account. According to § 284 HGB, specific information on property valuation must be provided here.
The accounting and valuation methods applied to land and buildings.
The methods of regular depreciation for buildings.
Justifications for extraordinary depreciation in the event of permanent impairment.
Information on reversals of impairment losses when the reasons for impairment no longer exist.
The development of fixed assets in an asset schedule.
These disclosure obligations for property valuations are not a mere formality, but are legally required and subject to penalties if not complied with.
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The HGB valuation of land and buildings follows a clear logic: the protection of creditors through cautious, cost-based valuation approaches. From the acquisition cost principle to the lower of cost or market principle, and up to value recovery, the legislator requires conservative and transparent accounting. Market value fantasies have no place here. A precise implementation of these rules not only protects against legal consequences but also creates a reliable basis for business decisions. Do you have doubts about whether your properties are correctly valued? A brief chat with our ImmoGPT can provide you with an initial assessment in just 60 seconds. A well-founded, AI-supported evaluation by Auctoa subsequently ensures maximum balance sheet security and uncovers untapped potential.
Additional useful links
Gesetze im Internet provides access to § 255 of the German Commercial Code (HGB), which regulates the manufacturing costs for the valuation of assets.
The Institute of Public Auditors in Germany (IDW) offers a pronouncement on accounting with IDW ERS IFA 3, addressing specific financial reporting issues.
Haufe offers an article on the valuation of land and buildings in the annual financial statements according to HGB, EstG, and IFRS, focusing on the commercial balance sheet.
The NWB database contains accounting-related information useful for the valuation of assets.
IWW provides an article on the valuation of real estate in fixed assets in the commercial balance sheet, including notes on IDW ERS IFA 2.
An additional document in the NWB database provides further accounting-related information.
Haufe highlights in another article the valuation of land and buildings in the annual financial statements according to HGB, EstG, and IFRS, this time with a focus on the tax balance sheet.
Wikipedia offers a comprehensive overview of the German Commercial Code (HGB), the legal basis for accounting in Germany.
FAQ
What costs are included in the acquisition costs of a property according to the German Commercial Code (HGB)?
The acquisition costs include the purchase price as well as all ancillary costs incurred for acquisition and making the asset operational. This includes real estate transfer tax, notary and land registry fees, brokerage commissions, and appraisal costs.
What is the difference between the strict and the moderate lower of cost or market principle?
The strict lower of cost or market principle (for current assets) requires a write-down for any impairment. The moderated lower of cost or market principle (for fixed assets such as real estate) mandates a write-down only for an impairment that is expected to be permanent.
Can I enhance a property beyond the acquisition costs?
No, according to the German Commercial Code (HGB), this is strictly prohibited. The acquisition cost principle (§ 253 para. 1 HGB) establishes the historical purchase or production costs as the absolute upper limit for valuation.
How is the useful life of a building determined for depreciation purposes?
The customary useful life is estimated based on empirical values and technical conditions. For residential buildings, a fiscal depreciation period of often 50 years (2% depreciation) is used, and for commercial buildings, 33.3 years (3% depreciation) is applied, from which deviations can occur under commercial law.
What happens if I breach the disclosure requirements in the appendix?
Missing or incorrect information in the appendix can result in the annual financial statements being classified as invalid. This can have civil and criminal consequences for the management, including fines.
How does a digital assessment help me with HGB accounting?
An AI-powered analysis can help accurately perform the necessary allocation of purchase price between land and building, providing a documented basis for impairment tests. This saves time and increases the audit reliability of your balance sheet items.
