Do your consolidated financial statements reflect the true value of your real estate? Switching from HGB to IFRS can unlock hidden reserves of up to 30% and reduce capital costs. Discover how to master the IFRS valuation of real estate in the consolidated financial statements.
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The topic briefly and concisely
The IFRS valuation of properties in the consolidated financial statements according to IAS 40 and IFRS 13 allows for a market-oriented representation that strengthens equity and is preferred by international investors.
The choice between the fair value model and the cost model has significant impacts on balance sheet ratios and result fluctuations.
Technology and AI-powered platforms are crucial for managing the complexity of Stage 3 assessments, enhancing efficiency, and ensuring audit compliance.
For internationally operating corporations, a financial statement prepared in accordance with IFRS is indispensable. It provides a level of comparability that investors worldwide demand. Unlike the HGB, which focuses on creditor protection, IFRS aims to provide decision-relevant information for the capital market. This leads to significant differences, particularly in real estate valuation. A market-based valuation according to IAS 40 and IFRS 13 can strengthen equity and improve financing conditions by several basis points. This article guides you through the key aspects of IFRS valuation of real estate in consolidated financial statements and shows you how to avoid pitfalls.
Fundamentals of IFRS Valuation for Real Estate in the Group
The IFRS valuation of real estate in the consolidated financial statements primarily relies on two standards. IAS 40 governs the accounting of properties held as financial investments (Investment Properties). These include properties held to earn rental income or for capital appreciation. In contrast, self-used properties fall under IAS 16. The second key standard is IFRS 13, which prescribes the methodology for determining the fair value for all assets. The fair value represents the price that would be achieved in an orderly transaction between market participants on the valuation date. This market-oriented viewpoint is the main difference from the German HGB, which is based on the strict acquisition cost principle. Insights into the differences between IFRS and HGB are crucial for correct application. Choosing the right valuation model is the next logical step.
The choice of the appropriate valuation model according to IAS 40
According to IAS 40, companies have a choice for the subsequent measurement of their investment properties. They can choose between the fair value model and the cost model. Under the fair value model, changes in the value of the property are recorded directly in the profit and loss account. Over 70% of listed European real estate companies use this model to reflect the true value. The cost model, on the other hand, is based on the historical cost or manufacturing costs, similar to German Commercial Code (HGB). A revaluation does not take place here, which often leads to significant hidden reserves. The decision for a model must be made uniformly for the entire portfolio and has far-reaching consequences for the balance sheet ratios. The advantages and disadvantages should be carefully considered.
Fair Value Model: Provides maximum transparency and reflects the current market value, but leads to higher volatility in results.
Cost Model: Ensures stable book values and lower volatility, but obscures the actual value development and potential of the portfolio.
Investor Preference: Over 80% of international investors prefer the fair value model due to better comparability.
Financing: A higher equity ratio due to fair value evaluation can improve credit terms by up to 0.5 percentage points.
The correct valuation of investment properties is fundamental. Once the decision for the fair value model has been made, IFRS 13 provides the framework for valuation.
The Fair Value according to IFRS 13: A three-level hierarchy
IFRS 13 structures the determination of Fair Value into a three-level hierarchy to make the objectivity of the valuation transparent. The level indicates the extent to which the inputs used for valuation are observable in the market. The higher the level, the more non-observable, company-specific assumptions are included in the valuation. Property valuations are almost exclusively allocated to Level 3, as they are based on internal models such as the DCF method. This requires particularly careful documentation and disclosure of the parameters used. The hierarchy is structured as follows:
Level 1: Quoted prices in active markets for identical assets are used here. This is practically never the case for properties.
Level 2: The valuation is based on observable inputs that are not directly prices for the identical asset, e.g., comparable rents for similar properties nearby.
Level 3: The valuation relies on inputs not observable in the market. These include assumptions about future cash flows, vacancy rates, or discount rates.
An accurate fair value property valuation is complex and requires deep expertise. This complexity is amplified when included in the consolidated financial statement.
Consolidation in Group Accounts: Specific Challenges
The integration of real estate valuation into the consolidated financial statements presents specific challenges. In the case of share deals, i.e., the acquisition of real estate companies, it must be examined according to IFRS 3 whether a business operation or merely an asset has been acquired. This distinction has a significant impact on accounting, especially regarding the recognition of goodwill. Deferred taxes are also a central issue. Since the fair value uplift affects profit and loss, but is often only realised for tax purposes upon sale, temporary differences arise. These lead to the recognition of deferred tax liabilities, which can reduce equity by 25-30% of the uplift. The correct calculation of deferred taxes is one of the most common sources of error in IFRS consolidated financial statements. For cross-border portfolios, currency translation effects also come into play, further influencing the results. The comparison of consolidated financial statements highlights the complexity. Therefore, disclosure obligations become all the more important for investors' understanding.
Disclosure obligations and their significance for investors
The IFRS places great emphasis on transparency, which is reflected in extensive disclosure requirements in the notes. For investment properties held as financial investments, companies must provide detailed information. This includes the reconciliation of carrying amounts from the beginning to the end of the reporting period. When applying the fair value model, the valuation methods and key assumptions must be disclosed. For level 3 valuations, IFRS 13 additionally requires a description of unobservable inputs and a sensitivity analysis. This shows how the result would change with a modification of the key assumptions (e.g., discount rate by +/- 0.5%). This transparency creates trust among investors and enables a well-founded analysis of the financial position. The IFRS disclosure requirements are therefore not an end in themselves, but an important tool for capital market communication. Modern technologies can help meet these requirements efficiently.
The role of technology in IFRS evaluation
The complexity of IFRS property valuation in consolidated financial statements, especially with Level 3 valuations, makes the use of technology indispensable. Manual processes with Excel spreadsheets are not only time-consuming but also prone to errors, which can lead to audit restrictions by the auditor. Modern platforms like Auctoa use AI and big data to automate and objectify valuation processes. By analysing thousands of data points in real time, assumptions for DCF models can be made more precise and comprehensible. This reduces the effort required for the preparation of the required sensitivity analyses by up to 50%. Technology-assisted valuations increase audit security and free up capacity for strategic portfolio decisions. Are you wondering what AI-supported valuation could look like for your portfolio? Try our ImmoGPT chat or request a non-binding analysis. A data-driven valuation of property portfolios is the key to efficiency.
ifrs-bewertung-von-immobilien-im-konzernabschluss
The IFRS valuation of real estate in the consolidated financial statements is much more than just an accounting obligation. It is a strategic tool that, when applied correctly, transparently reflects the actual economic situation of a group and highlights its value potentials. The choice of the fair value model under IAS 40 allows for market-oriented accounting, which is appreciated by international investors. However, implementation requires deep expertise in the standards IFRS 13 and IFRS 3 as well as in dealing with deferred taxes. Technology-supported solutions like those from Auctoa are key to mastering this complexity, increasing efficiency, and delivering audit-proof results. A precise IFRS valuation strengthens your balance sheet and builds trust in the capital market.
Additional useful links
IDW (Institut der Wirtschaftsprüfer) provides working aids and support documents related to ESG and IFRS.
The DRSC (Deutsches Rechnungslegungs Standards Committee) offers a brief report on the feedback from Phase 2 of the IFRS evaluation.
The IDW Verlag publishes a statement on the accounting and valuation of investment property in the commercial balance sheet (IDW RS IFA 2).
Destatis (Federal Statistical Office) provides information on construction prices and the property price index.
The Federal Ministry of Finance describes the Federal Agency for Real Estate Tasks (BImA).
The Bundesbank introduces the indicator system for the residential property market.
FAQ
Do I have to value all properties in the group according to the fair value model?
No, the choice between the fair value model and the cost model only applies to 'Investment Properties' under IAS 40. Owner-occupied properties fall under IAS 16 and are usually accounted for using the cost model. However, the decision for a model under IAS 40 must be applied consistently across the entire portfolio of investment properties.
How often does a fair value assessment need to be conducted?
An assessment of the fair value must be carried out on each balance sheet date. In practice, this means an annual revaluation for most corporations, often supported by external experts. In times of high market volatility, an intra-year valuation, such as for half-yearly reports, may also be necessary.
Can I change the assessment model afterwards?
A switch from the cost model to the fair value model is possible if it leads to a more relevant and reliable representation. However, a switch from the fair value model to the cost model is only permitted in very rare exceptional cases, such as when reliable fair value measurements are no longer possible due to a lack of market data.
What happens in a share deal of a real estate company?
When acquiring a real estate company (Share Deal), it must be determined whether it constitutes a Business Combination according to IFRS 3 or the acquisition of an asset (Asset Deal). This classification has significant implications for accounting, such as the recognition of goodwill and the treatment of transaction costs.
What are the benefits of an AI-supported IFRS valuation?
AI-powered platforms like Auctoa can analyse large volumes of data (e.g. market data, transactions, socio-economic indicators) to objectify evaluation parameters. This enhances the accuracy and traceability of assessments, speeds up the process, and improves audit security compared to traditional manual methods.
Are the costs for an external appraiser capitalisable in the IFRS valuation?
No, the costs for the subsequent assessment, such as fees for external assessors, should be recorded as ongoing expenses in the period they are incurred. They are not part of the acquisition or production costs of a property.
