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Background of the assessment
The valuation of a property is more than just a number. It is the result of many factors that often remain hidden. Would you like to understand the true value drivers of your property and make informed decisions? Learn more in our articles and get in touch for personalised advice by contacting us here.
A transparent property valuation takes into account numerous factors, from economic depreciation to current market developments, to determine the true value.
The knowledge of legal principles (HGB, EStG, IAS/IFRS) is crucial for correctly accounting for impairments and claiming them for tax purposes, thereby reducing financing costs by up to 2.5%.
The use of AI and Big Data enables automation of evaluation processes and a more precise risk assessment, leading to more efficient and well-founded decisions and increasing the accuracy of the assessment by up to 5%.
Real estate appraisal is a complex process that involves much more than just the square footage and location. To understand the true value of a property, it's essential to know the hidden aspects of appraisal. These include a wide range of factors, from economic depreciation to current market trends and interest rates. A well-founded appraisal is crucial not only for the sale or purchase of a property, but also for financing decisions and corporate management. Knowing these details enables you to make informed decisions and minimise potential risks.
Fundamentals of Depreciation
Definition and Differentiation
In the business context, depreciation refers to the reduction in value of an asset over time. This can be due to wear and tear, obsolescence, technological progress or economic changes. It's important to distinguish between scheduled and unscheduled depreciation. Scheduled depreciation, also known as amortisation, occurs regularly over the useful life of an asset. Unscheduled depreciation, on the other hand, becomes applicable when unforeseen events reduce the value of an asset. More information on the definition of depreciation can be found here.
Relevance of Appraisal
The appraisal of assets is important for several reasons. Firstly, it has a direct impact on a company's accounting and profit determination. Correct appraisal ensures that assets in the balance sheet are not overvalued and that profit is realistically represented. Secondly, appraisal is crucial for investment decisions and corporate management. It helps companies to make informed decisions about which assets to buy, sell or retain. Our appraisal standards provide you with a solid basis for your decisions.
Overview of Various Appraisal Occasions
A depreciation must be considered in various situations. This includes the regular review of the useful life and residual value of assets. If the useful life or residual value changes, depreciation needs to be adjusted accordingly. Furthermore, a situational review is required when there are indications of depreciation. Such indications can include declining market prices, technological changes or physical damage. The certified expertise of our appraisers helps you to correctly assess these occasions.
Value impairments can be triggered by a variety of factors that can be categorised in different ways. Understanding these causes is crucial to identifying potential value losses early and taking appropriate measures. The most common causes include wear and tear, technological advancement, legal reasons, substance reduction, price decline, poor investments, and disasters. A detailed analysis of these factors allows you to better assess the sustainability of your properties and make informed decisions.
Wear and Tear
Technical Causes
Wear and tear are natural processes that decrease the value of assets over time. Wear due to use (wear and tear) occurs when an asset is regularly used and therefore loses value. Time-related wear (ageing) also occurs when an asset is not used but is still damaged by environmental influences or chemical processes. These technical causes are particularly relevant for physical assets such as buildings and machinery. Regular maintenance and servicing can slow wear and tear but cannot completely prevent it. The reliable appraisal of your property takes these aspects into account.
Technological Advancement and Economic Changes
Obsolescence
Technological advancement and economic changes can also lead to value impairments. Technical obsolescence occurs when an asset is replaced by newer, more efficient technologies. Economic obsolescence (economic obsolescence due to demand shifts) occurs when the demand for a product or service changes, causing an asset to lose value. This is particularly relevant in fast-paced industries such as information technology. The value loss issue with electric cars is a good example of technological obsolescence.
Legal and Contractual Reasons
Expiration of Rights
Legal and contractual reasons can also lead to value impairments. The expiration of rights, such as a patent expiration or the loss of licenses, can significantly reduce the value of an asset. This is especially relevant for intangible assets such as patents, trademarks, and copyrights. Companies must ensure that they extend or renew their rights in a timely manner to avoid value losses. Our real estate experts are happy to advise you on these matters.
Substance Reduction and Price Decline
Market-Based Causes
Market-based causes such as substance reduction and price decline can also lead to value impairments. Substance reduction occurs when the amount of a resource decreases, for instance in raw material deposits. Price level decline occurs when prices for a product or service fall, for example, due to oversupply or decreasing demand. These factors are particularly relevant for companies operating in the raw materials industry. The value impairment on bonds is another example of market-based causes.
Poor Investments and Disasters
Extraordinary Events
Extraordinary events such as poor investments and disasters can also lead to value impairments. A poor investment leads to write-downs, as the asset does not provide the expected benefit. Disaster wear, for example, occurs through natural disasters that damage or destroy an asset. Companies must insure against such events and develop risk management strategies to minimise impacts. The legal aspects of such events must also be considered.
The legal and accounting principles of impairment are established in commercial law (HGB), tax law (EStG), and international accounting standards (IAS/IFRS). Understanding these regulations is crucial for correctly accounting for impairments and claiming tax benefits. Correct application of the regulations ensures that the balance sheet provides a realistic picture of a company's assets and minimises the tax burden. Knowing trusted online reviews can assist you in this.
Commercial Law Regulations (HGB)
§ 253 HGB
§ 253 HGB governs the valuation of assets in commercial law. An important distinction is between likely permanent and non-permanent impairment. In the case of likely permanent impairment, the asset must be written down to the lower value (lowest value principle according to § 253 para. 3 sentences 3 and 4 HGB). In the case of non-permanent impairment, write-down is not mandatory but permissible. The Haufe page offers more information on this topic.
Tax Law Regulations (EStG)
§ 6 EStG
§ 6 EStG governs the valuation of assets in tax law. Here, the strict lowest value principle applies to permanent impairments (§ 6 para. 1 no. 1 sentence 4 and no. 2 sentence 3 EStG). This means that an asset must always be written down to the lower value if a permanent impairment exists. A BMF letter dated 16 July 2014 provides further interpretations of this regulation. This letter clarifies when an impairment is considered permanent. Legal aspects are particularly important here.
International Accounting Standards (IAS/IFRS)
IAS 36
IAS 36 is the international accounting standard for impairments. It stipulates that an impairment test must be carried out to determine whether an impairment exists. In doing so, the carrying amount of an asset is compared with its recoverable amount. If the carrying amount is higher than the recoverable amount, an impairment exists. An unscheduled write-down must be made regardless of the expected duration of the impairment (IAS 36.BCZ96-97). The Deloitte page provides further insights into IAS 36.
The valuation of real estate requires the use of various methods and procedures to determine a value as accurately as possible. The choice of the appropriate method depends on various factors, such as the type of property, the purpose of the valuation, and the available data. The most common methods include determining the fair value, the use value method, and the replacement cost method. A combination of these methods can often lead to the most precise results. Our real estate experts support you in choosing the right method.
Determining Fair Value
Market Price
The fair value is the price that could be achieved in a transaction between knowledgeable, independent parties. Using current market prices is a common method for determining fair value. Comparable properties that have recently been sold are used in this process. This method is particularly suitable for properties with an active market. Financing plays an important role here.
Use Value
Discounted Cash Flow Method
The use value is the present value of the future cash flows that an asset is expected to generate. The discounted cash flow method is a common technique for determining use value. Future cash flows are discounted at an appropriate interest rate. This method is particularly suitable for properties that are rented or leased. The reliable valuation takes all relevant factors into account.
Replacement Cost
Replacement Procurement
The replacement cost are the costs that would be incurred to replace an equivalent asset. This method is particularly suitable for properties that are difficult to value, for example, due to their uniqueness or age. The certified expertise of our appraisers ensures an accurate valuation.
Depreciation affects various asset classes, including tangible assets, financial assets, current assets, and intangible assets. Each asset class has its own unique characteristics that need to be considered during valuation. A proper evaluation requires a thorough understanding of the respective asset class and the relevant valuation methods. Trusted online reviews can provide you with an initial overview.
Tangible Assets
Buildings, Machinery, Equipment
For tangible assets like buildings, machinery, and equipment, wear and tear, depreciation, and technical obsolescence must be taken into account. Depreciation usually occurs over the asset's useful life. In the event of an extraordinary impairment, the asset must be written down to the lower value. The property experts at Auctoa assist you with the valuation.
Financial Assets
Stocks, Bonds
Special rules apply to financial assets such as stocks and bonds. Stocks can only be valued below acquisition cost in exceptional cases, such as during a fundamental reorganization or insolvency of the company. Bonds are evaluated taking into account interest rate changes and credit risks. The impairment of bonds is a significant topic for banks.
Current Assets
Inventory, Receivables
For current assets, the strict lower of cost or market principle (§ 253 (4) HGB) applies. Inventory must be written down to the lower value if the market price falls below the acquisition cost. For receivables, default risks must be considered. Financing plays a crucial role here.
Intangible Assets
Patents, Licenses, Software
Intangible assets like patents, licenses, and software are amortized over their useful life. An impairment may be necessary due to technological advancements or changing market conditions. Legal aspects are especially important in the valuation of intangible assets.
The impairment has a significant impact on a company's balance sheet and profit and loss account. Correct accounting for impairment is crucial in presenting a realistic picture of the company's financial situation. Depreciation affects the total balance sheet value, equity ratio, operating result, and net income. Understanding these impacts is essential for corporate management. Our reliable valuation helps you make the right decisions.
Balance Sheet Presentation
Depreciation
Depreciation can be done either directly or through the creation of provisions. In direct impairment, the book value of the asset is directly reduced. When creating provisions, a separate item is shown in the balance sheet, representing the asset's loss in value. The choice of method impacts the total balance sheet value and the equity ratio. The real estate experts at Auctoa are happy to advise you.
Profit and Loss Account
Depreciation Expense
Depreciation expense is shown in the profit and loss account. It affects the operating result and the net income. High depreciation expense can negatively impact results, while low depreciation expense can positively impact them. Financing plays an important role here.
Hidden Reserves
Unrecorded Impairments
Unrecorded impairments lead to the creation of hidden reserves. These occur when an asset is undervalued, for instance, because an impairment was either not recorded or recorded at too low a value. The release of hidden reserves can positively impact results. Legal aspects are particularly important here.
Depreciation plays an important role in various industries. Specific case studies illustrate the challenges and peculiarities in the valuation of assets. Examining electric cars, real estate, and bonds shows how different factors can impact depreciation. An industry-specific analysis helps companies identify potential risks early and take appropriate measures. Our certified expertise ensures accurate valuation.
Electric Cars
Depreciation Issues
Electric cars are subject to particular depreciation issues. Rapid technological advancements and government incentives lead to older models quickly losing value. This affects residual values and leasing agreements. The depreciation issue with electric cars is an important topic for buyers and lessees.
Real Estate
Property Bubble
A property bubble arises from overvaluation, rising interest rates, and declining demand. This has significant effects on owners, buyers, and renters. The property bubble is a risk that must be considered when valuing real estate.
Bonds
Depreciation in Banks
Rising interest rates and credit risks can lead to depreciation in bonds. This affects bank balance sheets. Therefore, an analysis of banks' risk management practices is essential. The depreciation in bonds is an important topic for investors and banks.
The valuation of real estate faces significant challenges but also offers exciting future prospects. The complexity and uncertainty involved in estimating future cash flows and usage durations demand innovative solutions. The use of artificial intelligence and big data in valuation allows for the automation of valuation processes and more precise risk assessment. This is crucial for corporate management and the optimisation of investment decisions. Our valuation standards are continuously adjusted to account for the latest developments.
Challenges in Valuation
Complexity and Uncertainty
Estimating future cash flows and durations of use involves considerable complexity and uncertainty. Market developments and technological advancements must be taken into account. Therefore, a well-founded analysis and risk assessment are essential. Trustworthy valuations by our experts minimise these uncertainties.
Future Prospects
Technological Innovations
The use of artificial intelligence and big data in valuation enables the automation of valuation processes and more accurate risk assessment. This leads to more efficient and well-informed decisions. The certified expertise of our appraisers is complemented by technological innovations.
Importance for Corporate Management
Risk Management
Early identification of impairment risks is crucial for effective risk management. Optimised investment decisions contribute to increasing the company's value. Financing plays an important role in this context.
Understanding the fundamentals of property valuation is crucial for making informed decisions and minimizing potential risks. From the definition of depreciation to legal foundations and industry-specific case studies—a comprehensive knowledge of these factors enables you to recognize and secure the true value of your property. Leverage our expertise and innovative valuation methods to enhance your property strategy and achieve long-term value increases. Trustworthy online valuations can provide you with an initial overview.
Property valuation is a dynamic process that requires continuous adaptation to current market conditions. With Auctoa, you have a partner by your side who not only helps you assess your property but also imparts the necessary knowledge to successfully manage your property investments. Rely on our expertise and benefit from our innovative solutions to achieve your property goals.
Are you ready to take your property valuation to the next level? Contact us today to learn more about our services and arrange a personalized consultation. We help you understand the hidden aspects of valuation and optimize your property strategy. Get in touch now!
The Gabler Wirtschaftslexikon offers a detailed definition and explanation of the term impairment in the context of business management.
The Haufe site provides comprehensive information about the commercial law regulations concerning impairment, particularly concerning § 253 HGB.
Deloitte offers detailed insights into the international accounting standard IAS 36 on impairment.
The Handelsblatt analyzes the impairment of bonds and its impact on the balance sheets of German banks.
ecomento.de discusses the issue of value loss in electric cars and its causes.
What are the key factors to consider in a property valuation?
The most important factors include the location, size, condition of the property, as well as current market developments and interest rates. Economic depreciation also plays a role.
How does an automated property valuation differ from an appraisal by a surveyor?
Automated valuations use AI and algorithms to quickly determine a value. A surveyor takes into account individual aspects and conducts a detailed analysis, leading to a more accurate valuation.
What role does depreciation play in property valuation?
Depreciation, arising from wear and tear, deterioration, or technological advancement, reduces a property's value. A correct valuation takes these factors into account to determine the real value.
What legal foundations must be considered in depreciation?
The legal foundations are stipulated in the Commercial Code (HGB), Tax Code (EStG) and the international accounting standards (IAS/IFRS). These regulations dictate how depreciations are accounted for and claimed for tax purposes.
How does a property bubble affect valuation?
In a property bubble, prices are inflated. A realistic valuation must recognise this overvaluation and determine the actual value of the property to minimise risks.
What methods are used for property valuation?
Common methods include the determination of fair value, the discounted cash flow method, and the replacement cost method. Often, a combination of these methods is employed.
How can AI improve property valuation?
AI can enable the automation of valuation processes, provide a more precise risk assessment, and better forecast future market developments.
What advantages does a transparent property valuation offer?
A transparent valuation allows for informed decisions when buying, selling, or financing properties, minimises risks, and optimises property strategy.
