Do you own a property that you partially use yourself and partially rent out? Correct IFRS accounting for properties with mixed use is a common source of errors that can lead to incorrect valuations and significant risks. This article shows you how to correctly classify and assess your properties.
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The topic briefly and concisely
A mixed-use property can only be split into an IAS 40 part and an IAS 16 part if the parts can be sold separately.
If a division is not possible, the entire property falls under IAS 16 (Property, Plant and Equipment) if the owner-occupied portion is significant (in practice > 5%).
The choice between the fair value model and the cost model according to IAS 40 significantly impacts the volatility of the income statement.
The accounting for properties used both to generate rental income and for administrative purposes presents challenges for many owners and investors. An incorrect classification under IAS 40 (Investment Properties) or IAS 16 (Property, Plant and Equipment) can significantly distort financial statements and lead to poor strategic decisions. It is often unclear when a property must be split and when a single classification applies. This guide provides you with clear, data-driven guidance to correctly implement IFRS accounting for mixed-use properties and precisely determine the fair value of your assets. This creates a reliable foundation for your financial reporting and future investment decisions.
Basics: Correctly Distinguishing Between IAS 40 and IAS 16
International accounting primarily distinguishes between two standards for real estate. The International Accounting Standard 40 (IAS 40) governs the accounting of investment properties, which are held to generate rental income or for capital appreciation. In contrast, IAS 16 applies to owner-occupied assets such as office buildings or production facilities. Correct classification is the first step and has a direct impact on subsequent measurement and the profit and loss account. Incorrect classification can distort the reported assets by up to 20%. The differences between IFRS and HGB must also be considered. This initial decision lays the foundation for the entire subsequent accounting logic.
The central challenge: Define criteria for mixed use
A property with mixed use is when parts are both rented out and used by the owner. The key question for the IFRS accounting of properties with mixed use is whether the different usage portions can be accounted for separately. This is only possible if the individual parts can be sold separately or rented to third parties under a finance lease. If a separate sale is not possible, the property must be classified as a whole. A materiality threshold applies here: The property is only classified as an Investment Property under IAS 40 if the owner-occupied portion is insignificant. In practice, a limit of no more than 5% of the total area or the income value is often assumed. If the owner-occupied portion exceeds this, the entire property must be accounted for as a tangible asset under IAS 16. The valuation of Investment Properties thus follows clear rules. This distinction is crucial to avoid incorrect representation in the balance sheet.
Evaluation models according to IFRS: Cost vs. Fair Value
If a property or a significant part of it is classified as an Investment Property under IAS 40, you have the option for subsequent measurement. This option must be exercised consistently for all properties held as investment. You can choose between two models:
Fair Value Model (Revaluation Model): The property is regularly, at least annually, valued at fair value. Value changes are recognised immediately and fully in the profit and loss statement.
Cost Model (Acquisition Cost Model): The property is accounted for at continued acquisition or production costs and depreciated on a regular basis, similar to the provisions of IAS 16. The fair value must still be determined and disclosed in the notes.
The choice of model has significant impacts on the volatility of your results. The Fair Value Model can lead to annual profit fluctuations of over 10%, depending on market developments. A precise fair value property valuation is therefore essential. The decision for a model should thus be made strategically and with a view to the next 5-10 years.
Case Study: Accounting for a Mixed-Use Office Building
Imagine an office building with a total area of 10,000 m². Of this, 9,200 m² (92%) are rented out to external companies, while your company uses 800 m² (8%) as its own administrative headquarters. The individual floors cannot be sold separately. Since the owner-occupied portion of 8% exceeds the materiality threshold of 5%, the property cannot be classified as an Investment Property under IAS 40. The entire property must be accounted for as a tangible asset under IAS 16. This means it is measured at cost less accumulated depreciation and is depreciated over its useful life. A fair value measurement with profit or loss recognition of value changes is excluded. If the owner-occupied portion were only 300 m² (3%), the entire property would fall under IAS 40 and you could apply the fair value model. The valuation under IAS 40 offers more flexibility here. This example demonstrates how a small percentage change in usage can change the accounting by 100%.
Correctly reclassify changes in use
The use of a property can change over time, requiring a reclassification between the standards. Such reclassification is only permissible with an actual, demonstrable change of use – a mere change of intention is not sufficient. The correct procedure depends on the direction of the change:
From Property, Plant and Equipment (IAS 16) to Investment Property (IAS 40): This occurs when a property previously used by the owner is now rented out. At the time of reclassification, the property is measured at fair value. Any difference from the previous carrying amount is treated as a revaluation according to IAS 16 and is generally recognised in equity.
From Investment Property (IAS 40) to Property, Plant and Equipment (IAS 16): This happens when a property previously rented out is now used by the owner. The fair value at the time of the change in use becomes the new carrying amount (deemed cost) for future accounting according to IAS 16.
From Inventories (IAS 2) to Investment Property (IAS 40): When a property held for sale is instead rented out long-term, a reclassification occurs. The difference between the previous carrying amount and fair value at the time of reclassification is recognised immediately in profit or loss.
Every reclassification must be carefully documented, as it significantly influences the future revaluation of properties.
Observe disclosure obligations and deferred taxes
IFRS accounting requires extensive disclosure notes to ensure transparency. When applying the fair value model, you must disclose the valuation methods and key assumptions, such as the discount rates used. Additionally, a reconciliation is required to show the change in the carrying amount of investment properties from the beginning to the end of the reporting period. Another important aspect is deferred taxes. Since the IFRS fair value measurement typically differs from tax bases, temporary differences arise, leading to the creation of deferred tax liabilities. These can affect equity and net income by up to 30%. Therefore, a thorough analysis of IFRS disclosure requirements is essential for a compliant financial statement.
ifrs-bilanzierung-von-immobilien-mit-gemischter-nutzung
The IFRS accounting of properties with mixed use requires a precise analysis of the usage ratios and the legal separability of building sections. The 5% rule for the materiality of the own-use portion is a critical, practice-relevant hurdle for applying the advantageous fair value model under IAS 40. Incorrect classification can lead to significant accounting discrepancies and poor management decisions. A data-driven, neutral evaluation is the safest way to manage complexity and ensure a compliant, transparent annual financial statement. Do you have questions about the valuation of your mixed-use property? Auctoa's ImmoGPT chat can provide an initial assessment in just 60 seconds. A professional, AI-supported evaluation by Auctoa offers final clarity and security for your accounting.
Additional useful links
Haufe provides guidance on whether IFRS or HGB should be applied in accounting, with a focus on IFRS accounting in Germany.
The University of Regensburg offers a dissertation on accounting or auditing.
KPMG provides a brochure on accounting for properties under IFRS and HGB.
BDO offers information on consulting services for property accounting under IFRS or HGB in the real estate sector.
Haufe examines the classification of buildings with mixed use in financial statements according to HGB, IFRS, and tax law.
The NWB Database offers professional information on taxes, law, and economy.
Haufe provides an article on investment properties (IAS 40) and mixed-use properties.
The Institute of Public Auditors in Germany (IDW) provides information on the adoption of modules related to IFRS 16 (leases).
IAS Plus (Deloitte) reports on an IDW statement regarding property valuation.
Wikipedia offers a comprehensive article on International Accounting Standard 40 (IAS 40) – investment properties.
FAQ
What valuation models are available for investment properties according to IAS 40?
According to IAS 40, companies can choose between the fair value model (measurement at fair value with recognition of changes in value in profit or loss) and the cost model (measurement at amortized cost with regular depreciation) for the subsequent measurement of their investment properties. The chosen method must be applied consistently to all investment properties.
What is the 5% rule for mixed-use properties?
If parts of a mixed-use property cannot be sold separately, it must be classified as a whole. It is considered an Investment Property (IAS 40) only if the owner-occupied portion is "insignificant." In practice, an informal threshold of 5% of the total area or income value has been established for this. If the owner-occupied portion exceeds this, the entire property is treated as a tangible asset (IAS 16).
Do I still need to determine the fair value when applying the cost model under IAS 40?
Yes. Even if you choose the cost model, IAS 40 requires that the fair value of the property be determined and disclosed in the notes to the financial statements.
When is a reclassification of property required under IFRS?
A reclassification is necessary when an actual and demonstrable change in usage occurs. Examples include the commencement of own use of a previously rented property (reclassification from IAS 40 to IAS 16) or the end of own use and the start of renting out (from IAS 16 to IAS 40). A mere change of intention without an actual change in use is not sufficient.
